The impact of the VAT increase on the tourism industry

The end of the temporary VAT reduction due to take place in January 2010 is likely to adversely affect the UK tourism industry as a whole.

Although the return of the VAT rate to 17.5% will not have a particularly detrimental effect on accommodation providers and tourist attractions, it is bound to reduce the competitiveness of the UK, particularly in view of recent measures taken elsewhere in Europe. For instance, France lowered the VAT rate for restaurants from 19.6% to 5.5% and Germany announced that it will reduce its VAT rate on accommodation from 19% to 7% in January.

The higher tax rate compared with competing destinations means that visitors to the UK will face higher overall prices, which will make the country less competitive. These studies include the 1998 Deloitte and Touche study for the British Tourist Authority on comparative VAT rates for accommodation, a 2001 VisitBritain study on the comparative taxation of visitors to Great Britain, a 2002 Caledonian Economics report on the impact of lowering VAT rates on the accommodation and restaurant sectors, the 2004 UNWTO tourism taxation barometer, and a 2007 Council for Travel and Transport study – The Taxation of Overseas Visitors to Britain: A Comparison with Key Competitor Destinations.

Another report done by the British Association of Leisure Parks, Piers and Attractions (BALPPA) in 2008 – The Impact of Lower VAT Rates on UK Visitor Attractions and Accommodation – also shows that the loss to the Exchequer due to a lower VAT rate could easily be made up by the increased income and corporate tax gains, as well as savings in social security payments. “A reduction in the level of VAT for visitor attractions and accommodation could provide a tax positive boost to the Treasury circa £600m and provide circa 23,000 jobs,” said Colin Dawson, chief executive of BALPPA.

Moreover, the lower rate would also encourage investment in the sector, which could reverse the decline in the Balance of Payments and add up to £1.6bn in the first year, with more gains in the successive years.

A comparison of VAT rates in some of the top competing tourist destinations (France, Spain, Italy, the US and Australia) shows that on average, visitors to the UK will pay about 10% more on accommodation and restaurants, and 3.5% more on attractions and other items, than they would in any of those alternative countries. This means that a VAT rate of 17.5% puts the UK tourism sector at a clear disadvantage in what is a very competitive global tourism market.