Work starts with Treasury on VAT rates

With the launch of a new Tourism Policy six months ago, the Government set a challenging target for domestic tourism growth over the next 10 years. This target is to “increase the proportion of UK residents who holiday in the UK to match those who holiday abroad each year. For longer stays (4 nights or more) this would mean 29% of travellers holidaying in Britain rather than just 20% today (creating 4.5m extra domestic trips each year, £1.3bn more spend and 26,000 new jobs)”.

One of the main challenges to achieving this target is to make the cost of UK domestic holidays competitive in the global tourism market. While it is cheaper for UK residents to undertake holidays abroad, it will be difficult to increase the proportion of UK residents holidaying at home. One of the main areas where UK businesses are at a disadvantage compared to their European counterparts is in the level of VAT that is applied to accommodation.

With VAT at 20%, the UK now charges the second-highest level of VAT for accommodation of the 27 European Union countries (behind Denmark). Almost all other European countries apply a reduced rate of VAT for accommodation in recognition of the ability of tourism to boost growth and employment. Indeed, Ireland has just reduced its already low rate of VAT on accommodation from 13% to 9.5% in order to rebuild their economy.

Because of this, the British Hospitality Association, along with other Trade Associations and leading tourism companies, has started work with HM Treasury to determine the impact on the UK economy of reducing VAT on accommodation businesses. As part of this work, Deloitte, a consultancy, has developed an econometric model that simulates the impact of reducing VAT on accommodation businesses. This model suggests that lowering VAT would create 100,000 additional jobs and provide the Treasury with a net increase in revenue within three years.

Using this research as a starting point, a BHA-led VAT Working Group is set to begin discussions with Treasury officials to refine the model and hopefully come to an agreed position on the benefits to the UK economy of reducing VAT. It must be stressed that this work is likely to take a number of years to complete and, even then, there is no guarantee that the Government will reduce VAT. Yet, that the Government is willing to work with the industry to determine the impact is certainly a significant step in the right direction.