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Beyond the balance sheet

Why lobbying to cut tourism VAT in the hospitality trade is doomed to fail

Matthew Wyatt 12/12/2016 6 minute read

Matthew Wyatt FCA argues the hospitality trade needs to turn its focus away from the cut tourism VAT campaign.

At the Tourism and Hospitality Summit 2016 the industry continued to press for a reduction in VAT on a variety of hospitality services. Understandably the Brexit referendum result has reinvigorated the cut tourism VAT campaign. Given the recent political overhaul and an agenda from the people for a future outside of the EU, is this desired VAT cut now realistic?

With at least three other campaigns on the go, including pressure from various other sources including some MPs, the government has yet to yield on this matter. In fact Brexit has made any relaxation even more distant. Independent hospitality business owners would thus be well advised to get used to operating with VAT at current levels for some time yet as they make plans for the future.

The case for a VAT cut

Given the UK could become a major competitor to EU countries, depending on if and how we leave the EU, many in the industry argue that we should follow the lead of countries such as Denmark and Slovakia. That means VAT cut on a combination of hotel accommodation, theatre/cinema admissions, visitor attractions and restaurant meals to around 5%. 

The argument goes that this lower rate of VAT would attract more visitors to the UK and encourage staycations thereby helping the UK economy as follows:

  • Improve industry turnover due to greater demand stimulated by lower prices
  • Improve tax receipts and national insurance payments with new jobs and higher consequent wages
  • Reduce unemployment and social security payments with some new jobs filled by those previously unemployed
  • Increased corporation tax payments as a result of improved turnover and higher profit margins
  • Greater income tax as a result of tax paid on dividends generated by the sector
  • The multiplier effect of taxes generated further down the supply chain from accommodation and attractions

The thrust of the campaign is to focus on reducing VAT for serviced accommodation and attractions, with other campaigns such as restaurant meals and even alcohol sales seen as having little chance of success. It’s projected that the reduction to 5% VAT would create 123,000 new jobs, yielding £3.9bn in additional tax over the course of 10 years.

The case against

That all seems very logical and quite convincing. But is it compelling? A closer assessment of these claims reveals plenty of counter arguments.

1. Brexit

There's potential that our European neighbours could become competitors which makes the argument of unfair treatment in comparison to fellow EU trade block countries somewhat unjustified. 

2. UK finances

We’re still living with the consequences of the 2008 financial crisis. Even with new leadership indicating a change of policy, the fact remains the UK still has an annual budget deficit of £74 billion and a total debt pile of £4.8 trillion (including all state and public sector pensions)!

So don’t expect a VAT cut any time soon for one particular industry. The Treasury needs every penny it can muster from tax receipts. Changes to tax policy for one sector will only lead to other industries pleading their case. Even the Brexiteers plea to cut VAT on household fuel bills from 5% has held little traction!

AS UK borrowing projections

 

3. The declining value of the pound

Lowering VAT for accommodation services and attractions might encourage more staycations but this is actually already happening without any reduction. Why? Well, the 10% fall in the value of the pound post the EU referendum result has achieved the campaign’s objective.

A weaker currency encourages tourists and their money goes further in this country while it also discourages British citizens from holidaying abroad as it makes their travel and foreign expenditure more expensive. So a depreciating currency will boost staycation trade. 

4. Financial benefits of a VAT cut are assumptive

The campaign has clearly produced a well thought through and detailed case which has been endorsed by some economists. However, whilst costs are well known, potential revenue generation is exactly that, potential, it’s a forecast. The Treasury sees the acknowledged loss in revenue for the first few years of a VAT reduction but remains unconvinced of the later benefits. 

5. Other presumptions

The campaign’s argument is founded on the belief that all operators in the industry will pass on the VAT cut in reducing prices by the full amount for their customers. This is very difficult to prove and while Merlin Entertainments and Premier Inn have vowed to pass on any cut in full, the belief that competition will force other operators to follow suit is highly assumptive.

Businesses make strategic decisions based on a number of factors. There are many different segments to the hospitality and tourism sector. What is applicable for one set of organisations doesn’t necessarily work for others. For example, do you really think that the higher priced hotel market would see the need or pressure to pass on such a cut?

Therein lies some of the flaws in the projections and modelling. What if only 50% of the trade follow the example set by Merlin and Premier Inn? Even passing on a full reduction will have limited impact as business clients (who make up a significant part of the market) recover VAT from their expenditure.

Many small businesses aren’t registered for VAT and to do so (as the campaign states the cut would encourage) would simply add to their administrative burden. Where’s the benefit to them? Any campaign to ensure prices are reduced by the full amount would be extremely difficult to enforce.

6. A campaign that tackles the wrong probelm

A cut to VAT and thus reduction in prices is seen as a strategy to boost demand and consumption. Demand and growth aren’t the issues though. Growth has been consistent for the last 20 years despite the financial crisis and terrorist threat. London hotels enjoy 80% occupancy rates, demand remains high and prices are strengthening year-on-year.

Given current significant growth it’s difficult to see a case for a tax cut. There is similar situation in the foodservice sector. Eating out remains strong (and embedded in British culture) with Horizons predicting growth up by 1.8% in 2016 compared to 2015.

Tourism numbers do fluctuate and are cyclical but London’s global pull makes it one of the big destinations. Why therefore does it need state aid in the form of a tax cut? The big challenge facing most hospitality operators isn’t demand but rather supply side.

It’s the rising cost base brought on by initiatives such as The Living Wage. Payroll costs are up which means most of any reduction in VAT would be put towards paying the rising wage, especially as by 2020 the Living Wage will reach £9 an hour.

Tourism and hospitality should focus on the real issues

Clearly much time and effort went into the well prepare Cut Tourism VAT campaign. Given the issues facing the industry however, perhaps overall strategy and focus should shift away from a flawed VAT cut to supply side items where solutions can have a major impact and are badly needed:

New Call-to-actionThe content of this post is up to date and relevant as at 07/09/2016.

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