Written Evidence submitted by Hospitality Ulster for the Northern Ireland Affair’s Committee’s inquiry into promoting the tourism industry in Northern Ireland through the tax system (TAX0005)

1. IN BRIEF

1.1 Hospitality Ulster represents the diverse range of businesses that make up the hospitality industry in Northern Ireland.

1.2 Tourism in Northern Ireland provides c45,000 jobs and delivers c£750 million to the Northern Ireland economy.

1.3 Currently 25 of 27 EU countries have reduced tourism VAT. The UK’s current rate of 20% is almost twice the European average which undermines competitiveness against countries with lower rates of VAT.

1.4 The UK is ranked 140 out of 141 countries for price competitiveness in tourism. The price sensitive nature of the tourism industry means tourist businesses in the UK are losing out to our European counterparts due to the high level of VAT.

1.5 Northern Ireland is the only part of the UK to have a land border with a member state - the Republic of Ireland – which has a tourism VAT rate of 9% on accommodation, food and visitor attractions. A situation further exacerbated as the Republic of Ireland is our largest market and closest competitor.

1.6 The Republic of Ireland has had a 9% Tourism VAT Rate since 2011, resulting in a 15.8% increase in visitor numbers, a 13.25% increase in revenue and a 19% increase in tourism jobs.

1.7 There is no doubt the potential impact of a reduction in tourism VAT in Northern Ireland is significant. Based on the experience of the Republic of Ireland we can predict the growth a reduction in tourism VAT would have in Northern Ireland over a similar timeframe. The potential to increase total visitor numbers to c5.2million; increase total revenue to over £850million; and increase employment within tourism to c53,550 is a real one.

1.8 The campaign to reduce tourism VAT has cross party support in Northern Ireland and has the backing of the Northern Ireland Assembly.

2. Introduction

2.1 Hospitality Ulster represents the diverse range of businesses that make up the hospitality industry in Northern Ireland. Our membership includes pubs, hotels, restaurants, airports, sports venues and major visitor attractions.

2.2 Founded in 1872, it has witnessed significant change as members’ businesses have evolved and grown in response to changing consumer trends, the growth in tourism, and shifting economic climates.

2.3 The Executive team at Hospitality Ulster works closely with members to engage with key decision makers, the aim being to create a better business environment. Working with other stakeholders, Hospitality Ulster has a proven record of crafting its argument on evidence-based research, and is viewed as the respected voice of the hospitality industry in Northern Ireland today.

2.4 Tourism in Northern Ireland is worth over c£750 million to the local economy, and is responsible for approximately c45,000 jobs. Currently, with such a high VAT rate - particularly in comparison with that in the Republic of Ireland – the issue of competitiveness is a huge concern.

2.5 Under European law the VAT charged on tourism related services can only be reduced on a UK wide basis. To support this goal Hospitality Ulster has worked closely with other organisations including the British Hospitality Association (BHA) and the British Beer and Pub Association (BBPA). Whilst each of these organisations has a particular interest in a defined area for a VAT reduction, e.g. food or accommodation, Hospitality Ulster is the only one that represents a wider cross section of the industry and therefore supports a VAT reduction on food and accommodation.

Key Northern Ireland Tourism and Hospitality Statistics

• In 2014 overnight trips by all visitors (domestic and external) stood at 4.5 million, up 11% on 2013.
• Associated expenditure increased by 4% (to £751m in 2014); in 2014 external (outside NI) overnight trips increased by 4% to 2.2m.
• Spend linked with these trips fell by 3% to £514m -the strong pound may have influenced this.
• Over 15 million visits were made to local visitor attractions in 2014, a 3% increase on 2013.
• Hotel room occupancy stood at 65% up from 64% in 2013.
• 1.85 million hotel room nights were sold in 2014.
• There were 15.3 million visits made to visitor attractions during 2014.
• Hospitality is a key revenue generator in the overnight tourism market.
• There is a positive relationship between the size of the hospitality sector and tourism potential in NI.
• The Hospitality Industry provides 1 in 20 jobs in Northern Ireland
• £70.5 million payments in Corporation Tax (Pubs (£16.2m), Hotels (£19m), Restaurants (£35.1m) and Event Management (£0.1m).
• The NI hospitality industry sustains 60,000 total jobs (Direct, Indirect and Induced) – 45,000 can be attributed to food and drink element.
• £653.4million wage contribution of the hospitality industry (Direct, Indirect and Induced)
• The hospitality industry contributes £17.9m in business rates in Northern Ireland.

3. Policy Background

3.1 Why is a lower tourism VAT rate important to the UK?

• The UK tourism industry employs 10% of the UK’s workforce and generates 9% of UK GDP and needs to be sustained;

• Over time, more tax will be raised by the Exchequer if VAT is reduced- £3.9 billion over 10 years;
• Potential to create123,000 new jobs across the UK;
• It will increase the competitiveness of regions that rely heavily on tourism such as Northern Ireland;
• Fairer and cheaper good and services for consumers holidaying in the UK;

The tourism industries are a major component of the overall economy. Tourism is the fourth largest service industry and brings economic growth, wealth and employment around the UK.

3.2 If VAT is not reduced, the UK’s share of international tourism receipts will 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 also find it increasingly hard to get a job and regions where tourism is a main source of income will be increasingly depleted.

4. Positive impact of reducing Tourism VAT on accommodation in a UK wide context:

• An increase in the competitiveness of regions that rely heavily on tourism, such as seaside and rural communities;
• Generation of more investment for regional businesses and support for wider regeneration across the United Kingdom;
• Lower and fairer prices for consumers and fairer and cheaper for consumers holidaying in the UK;
• Encouraging tourism in Britain and increasing international competitiveness;
• Incentivised domestic and foreign tourists to choosing Britain for holidays;
• Support for the 2.4 million jobs outside London;
• An increase in the competitiveness of regional tourism hotspots. For every £1 of tourism spend a further £0.70 is spent in the wider local economy;
• Assistance for regions economically - especially those in rural and coastal areas.

5. Positive impact of reducing Tourism VAT on food in the UK wide context:

5.1 Oxford Economics analysis for the BBPA shows that a VAT cut on food in the hospitality sector could generate up to 471,000 new jobs the sector. The effect on Government income would be a loss of up to £1.9bn and hence a reduction to 5% would of course be a major commitment at this stage in the economic recovery term.  However, a staged reduction would provide a huge boost to the sector, be more manageable from the perspective of Government finances, and from a Northern Irish perspective allow a more level playing field with the Republic of Ireland.

Table 1: Estimated impact of VAT reduction on food

Source: Oxford Economics, 2012

Other recent studies have also demonstrated that Government, over time, would receive full payback for a reduced VAT rate in the hospitality sector.

5.2 It is important to note that this is not just special pleading.  A new study from Oxford Economics in November 2015 highlighted that despite vital beer duty cuts in 2013, 2014, and 2015 the pub still faces a huge tax burden. Indeed, approximately £140,000 per pub (or £34 in every £100 spent) goes to the Government in taxes and pub-specific regulations. This is a huge £7.3 billion of which the largest component at £3.4 billion is VAT on sales.

5.3 The study also compared 67 industry sectors and found that per pound of turnover, pubs paid the second highest business rates bill and had the fourth highest net VAT bill, five times larger than the retail sector. 

6. Northern Ireland is unique:

6.1 Northern Ireland is the only part of the UK to have a land border with a member state - the Republic of Ireland - with a tourism VAT rate of 9% on accommodation, food and visitor attractions. A situation further exacerbated as the Republic of Ireland is our largest market and closest competitor.

6.2 Following the reduction in tourism VAT (2011), 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.

6.3 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.

6.4 Not only are inbound tourists choosing the Republic of Ireland over Northern Ireland, the domestic market within Northern Ireland also see holidaying in the Republic of Ireland as a better value option.

6.5 Hospitality Ulster has been at the forefront of the tourism VAT campaign in Northern Ireland, working pro-actively to engage with policymakers securing cross-party support at the Northern Ireland Assembly and at Executive level. Whilst there are undoubtedly many challenges to securing a successful outcome, the same negativity, ‘this will never be achieved’ argument was also deployed by those who argued that devolution of Corporation Tax powers could never happen. Despite many disappointments along the way, this has been delivered and it is now in the hands of locally elected representatives to demonstrate the political will to use the devolved power for the benefit of the local economy.

6.6 A reduction in the tourism VAT rate would act as an economic lever in Northern Ireland to:

• Provide a more competitive tourism offer;
• Generate jobs and create wealth;
• Allow the sector to invest in further skills development;
• Encourage new businesses to set up;
• Allow companies to reinvest. 

7. The positive impact of reducing tourism VAT in the Republic of Ireland (currently 9%)

7.1 Despite a deficit far worse than that faced by the UK, the success in a reduction of VAT (at 9%) applied to accommodation, food and visitor attractions in the Republic of Ireland from May 2011, is one of the best examples in Europe of how this economic lever can work to the advantage to the tourism and hospitality sector.

7.2 Although the Irish Government anticipated that this would be a temporary measure, due to its success it has now been extended indefinitely. The direct VAT income loss to the Irish Exchequer was also much lower than had been forecast by government - €107m per annum rather than €350m.

7.3 Since the introduction of the 9% Tourism VAT rate in the Republic of Ireland, visitor numbers have increased by 1 million, 33,000 jobs have been created and the total tourism revenue generated has increased by around €750 million which equates to around £526 million.

7.4 The impact can also been seen in:

• Price pass-through of the rate reduction to consumers being evident across every category it was applied to;
• Improved Value for Money perception across all visitors with ratings now at levels last seen in early 2000s;
• Renewed growth and investment by businesses in the tourism industry.

8. Applying these results to Northern Ireland

8.1 Given its market similarities and geographical location, the tourism VAT reduction in the Republic of Ireland allows us to see first-hand what effect a similar reduction in tourism VAT could have in Northern Ireland.

8.2 If we extrapolate the Republic of Ireland figures using the same percentage gains we can see how Northern Ireland could specifically benefit, with increased visitor numbers, increased revenue and increased jobs.

8.3 Visitor Numbers

Between the 2011 and 2014 visitor numbers to Republic of Ireland increase by 15.8% (resulting in 1 million additional visitors). If we apply the 15.8% increase to the 4.5million visitors to Northern Ireland in 2014, we could potentially see an increase of 711,000 additional visitors over a similar timeframe.

8.4 Tourism Revenue

Between 2011 and 2014 tourism revenue in Republic of Ireland increased by 13.25% (an increase of £526 million). If we apply the 13.25% increase to the Northern Ireland tourism revenue of £751 million in 2014 this could lead to additional revenue of £99.5 million over a similar timeframe.

8.5 Job Creation

If the Republic of Ireland tourism jobs went up by 19% from 2011 to 2014 after the VAT reduction, and if we apply the same 19% increase to the c45,000 jobs currently in Northern Ireland tourism industry, we could potentially deliver an additional 8550 jobs over a similar timeframe.

9. The potential for Northern Ireland

9.1 There is no doubt the potential impact of a reduction in tourism VAT in Northern Ireland is significant. Based on the experience of the Republic of Ireland we can predict a reduction in Tourism VAT has, over a similar timeframe. The potential to increase total visitor numbers to c5.2million, increase total revenue to over £850million and increase employment to c53,550 is a real one.

10. Cross-Party Support within Northern Ireland, a few examples:

“A cut in the Vat rate for the accommodation and hospitality sectors would result in increased demand, which would in turn boost recruitment, investment and expansion right across the UK.”

Jonathan Bell MLA

Minister for Enterprise, Trade and Investment

“I have long supported the campaign led in Northern Ireland by Pubs of Ulster (Hospitality Ulster) to reduce the rate of VAT for the hospitality sector. The experience of our near neighbour in the Irish Republic is that a 9% rate there has created 30,000 new jobs and increased revenue for the Irish Exchequer by €165 million since 2011. I firmly believe that a VAT cut for the hospitality sector would greatly help not just the tourism industry in Northern Ireland but also across the entire United Kingdom. Our disadvantage compared to the Irish Republic makes the case for Northern Ireland a very convincing one.”

Simon Hamilton MLA

Minister for Health (Former Finance Minister)

“A reduction in tourism VAT is a key economic driver that the SDLP has consistently pressed for at Westminster. We have had 3 parliamentary motions since 2012 and I have held a Westminster debate on the issue. We are calling on the Chancellor to cut VAT rates for businesses in the tourism sector and put us on an even footing with the majority of European countries which have introduced VAT reductions for the tourism sector in recent years to promote tourism and to protect and nurture jobs.

“Northern Ireland is at a huge disadvantage because our rate remains high, while the Republic of Ireland has reduced the rate in its own tourism sector to 9%. This gives businesses there a significant competitive advantage over local tourist enterprises and means we are always struggling to compete on a level footing.

“The SDLP will make this a key manifesto commitment in the upcoming election and I will continue to press the Chancellor on this.”

“Sharing a land border with the Irish Republic, Northern Ireland is at a distinct disadvantage. The difficulty of competing is even more apparent in Northern Ireland, as the tourism and hospitality sector in the Republic is subject to a Vat rate of only 9%. Evidence shows that reducing the rate of tourism Vat in the UK would lead to the industry expanding and stimulate jobs."

Margaret Ritchie MP

SDLP MP and Co-Chair of the All-Party Group on the Visitor Economy

“The DUP support a cut in the VAT rate on hotel and restaurant services. An increase in overnight stays and meals would sustain and create jobs and enable small business to compete with other destinations across Europe and in particular the Republic of Ireland. The UK currently applies one of the highest rates of VAT on hotel accommodation and restaurant meals in Europe. If hotels passed on the entire rate cut, they would become significantly more competitive - particularly important when visitors come to 'destination Ireland'. Following this course would create more customers and ultimately increased revenue, but in the short term it is likely hotels and restaurants would pass on an element of the rate cut and retain some of the extra margin generated as investment capital. Hotels are capital intensive and require significant ongoing capital works.”

Democratic Unionist Party

“Alliance has publicly supported a reduction in the VAT rate for businesses in the Northern Ireland tourism sector and continues to do so. The competitive disadvantage with the Republic of Ireland makes things extremely difficult. A reduction would bring constructive changes, even up the playing field and result in long-term gains.”

Naomi Long

Former Alliance Party MP for East Belfast

“I am very keen to see a significant reduction in the rate of VAT across the whole of the UK for businesses in the tourism sector.  It would give a much-needed and important boost of all of those businesses and, in Northern Ireland, it would also help the Government’s plans to rebalance the economy.  I’ve already written to the Chancellor, George Osborne, urging him to use his last Budget Statement before the next General Election to announce a VAT reduction for all businesses operating in the tourism sector.  Let’s hope he lives up to expectations that he is a Chancellor who listens.”

Lady Sylvia Hermon MP

“The Ulster Unionist Party has long supported a UK wide reduction in the rate of VAT charged on goods and services associated with the Tourist trade. Tourism is a major potential economic growth area for Northern Ireland, but it must be allowed to compete on a level playing field with the Irish Republic. Supporting this campaign at Westminster would be a priority area for Ulster Unionist MPs elected in May.”

Danny Kinahan MP

Ulster Unionist Party MP for South Antrim

“Sinn Féin would welcome a VAT reduction by Westminster for businesses in the tourism sector. It would be important that all those offering a tourism product in Ireland should operate on a level playing field.” 

Daithí McKay MLA

Sinn Féin MLA and Chair of NI Assembly Finance Committee

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