VAT rates have risen to the forefront of the political agenda in recent weeks with the government continuing to resist a reduced 5% VAT rate for hospitality businesses despite cross-party support for the cut. The debate follows years of campaigning from the hospitality industry for the UK to mirror the sector specific VAT cuts implemented by other EU member states.

Cut Tourism VAT, an organisation supported by over 3,500 hospitality businesses, is leading the campaign for a reduced VAT rate.

Economic Stimulus

In the Parliamentary debate, MPs supporting the proposal pointed out that the UK’s tourism sector, which produces more than 10% of GDP and supports over 2 million jobs, has been hit particularly hard by the rises in VAT introduced by the coalition government as part of their austerity package.

Cut Tourism VAT’s campaign focuses on the increase in competitiveness a VAT cut would have on the UK as a tourist destination, both for incoming tourists and for UK tourists. Cut Tourism VAT claim that the cut would stimulate the economy in rural and coastal areas that are not sharing the London-led UK economic recovery, supporting the vital SME sector into which so many leisure, tourism and hospitality businesses fall. To put the situation in context, the UK is now ranked 138th out of 140 countries for price competitiveness for tourism by the World Economic Forum.

It is estimated that the measure could boost GDP by £4 billion per annum, create and secure up to 80,000 jobs and deliver £2.6 billion additional net revenue back to the Treasury over ten years. Cut Tourism VAT claim that, according to HM Treasury’s own economic model, a cut in VAT rates would be one of the most efficient means of generating GDP gains at low cost to the Exchequer.

EU VAT Rates

Under EU laws, member states are permitted to reduce VAT rates for a limited number of services and industries, including tourism. Other EU countries have taken advantage of this, with only four countries (the UK, Denmark, Lithuania and Slovakia) not implementing reduced VAT rates for hotels and 13 member states, including Ireland, introducing lower rates for restaurants.

In 2010, Germany introduced a reduced VAT rate on accommodation which has been a significant stimulus for Germany as a tourism region. In a survey conducted by German Institute of Management Tourism (IMT) on 5,000 accommodation businesses, it was reported that between them the measure had seen an additional €939.6 million invested and had created over 11,000 new jobs and apprenticeships, and had also reduced average room rates by 1.6 per cent, during a period of rising demand.

Ireland has been a similar success story where the government has reduced VAT on hotels, tourist attractions and restaurants from 13.5% to 9%. The VAT cut has led to growth and new jobs in the hospitality and tourism sector.

No Plans for VAT Cut

Treasury Minister David Gauke, speaking at a recent debate in Westminster Hall, declared that the government has no plans to introduce the VAT cut following the debate on the basis that it could cost between £9bn and £10bn a year in lost revenue, a cost which, in his view, still remains disproportionate to the additional anticipated economic growth. He stated that such a cut was contrary to the government’s long term plan to reduce the deficit.

The government is also facing calls to extend any cut in VAT to other struggling sectors such as the retail sector and the Prime Minister is yet to be convinced that the hospitality industry deserves favourable VAT rates over these sectors. Rather than focusing attention on a cut in VAT, David Cameron has suggested that the hospitality industry should be focusing on opportunities for promoting Britain to overseas visitors and capitalising on the falling value of the pound.

Industry Reaction

Following David Gauke’s comments, the industry remains upbeat that the campaign is gathering momentum. Cut Tourism VAT stated that “The debate represents a huge step forward in pushing the cause of reduced Tourism VAT up the political agenda. There was strong support from MPs of all parties, representing many different areas of the UK….. The government is now coming under real pressure notably from many of their own MPs. A General Election coming up this year represents a great opportunity”.

The UK government has so far resisted the hospitality industry’s campaign for a VAT cut however, a desire to keep the UK competitive in the tourism market and to attract lucrative overseas tourists, may, in time, make this proposal harder to resist.