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Reducing VAT on tourism will deliver growth for the UK economy

Graham Wason graduated  from Surrey with a BSc in Catering and Hotel Administration in 1973. He is currently Chairman of Cut Tourism VAT Campaign, and below gives his personal opinion on how a cut in tourism VAT could benefit the UK economy.

Did you know that if you stay in a hotel or guest house in Germany or France, the bill you pay has VAT included at 7%, compared to 20% on the equivalent bill in the UK? So you get better value if you spend your hard-earned cash abroad rather than on domestic trips and holidays.

This disparity in VAT rates makes the UK uncompetitive. It not only encourages UK citizens to travel abroad, it also deters visitors coming to the UK.

High VAT is one of a number of factors that make the UK rank 138th out of 140 countries for the price competitiveness of its travel and tourism sector, according to the World Economic Forum.

The UK Government can address this anomaly if it chooses to do so. Rules relating to VAT are regulated by the EU. Tourism is one of a very limited number of sectors to which EU countries are permitted to apply a reduced rate of VAT. As tourism is internationally competitive and labour intensive, reducing tax feeds through to lower prices and this attracts more foreign visitors and encourages residents to holiday at home.

All but four of the EU’s 28 countries apply reduced VAT to hotels and other visitor accommodation – the UK is in the company of Denmark, Slovakia and Lithuania as the only countries not taking advantage of a reduced rate. Most countries also apply reduced VAT to visitor attractions and around half do to restaurants.

This disparity is not new. In 1993, VisitBritain (then the British Tourist Authority) set up a working group to lobby the UK government to reduce VAT on tourism. At that time I was a partner in the Tourism and Leisure Consulting Division of Deloitte (then Touche Ross) and led a team that undertook a comprehensive analysis of the impact of such a reduced rate. The study showed that reducing VAT would trigger a virtuous cycle of increased tourism demand and economic growth that within four years would wipe out Britain’s steadily worsening tourism balance of payments.

The first report was published in 1995 and updates were carried out in 1997 and 1998. I was involved in further studies in my own name for other clients in 2002, 2008, 2010 and 2011.

The latest and most comprehensive report to date was commissioned by Bourne Leisure Group (owner of Butlins, Haven Caravan Parks and other businesses) and Merlin Entertainments Group (owner inter alia of the London Eye, Legoland and Madame Tussaud). In 2011, Bourne and Merlin joined forces with the British Hospitality Association and the British Association of Parks, Piers and Attractions, and the present-day Cut Tourism VAT Campaign was launched.

The Bourne/Merlin report incorporated a Dynamic Partial Equilibrium model, the results of which showed that reducing VAT on visitor accommodation and attractions would lead to the creation of 80,000 jobs. It would also boost the economy and increase taxation income, generating a fiscal return to the Exchequer over ten years of £2.6 billion (net present value at 2011 prices).

The findings were presented to Treasury officials and permission granted for the campaign to model the potential impact of reduced tourism VAT using the Treasury’s own Computable General Equilibrium (CGE) model – perhaps the only campaign in any sector ever to be granted access to the HMT’s own CGE model. The work was undertaken by Professor Adam Blake of Bournemouth University who built and maintains the model on behalf of HMRC and HMT.

The analysis using this model suggests that the UK will benefit from substantially higher GDP gains, peaking at £4 billion per year, and that a reduction of VAT on tourism services would be close to fiscally neutral. Reducing VAT on tourism was compared in the CGE model to other measures aimed at boosting the economy, as follows:

  • A 2p reduction in the standard rate of corporation tax
  • A 20% reduction in rates for employers’ national insurance contributions
  • A 1p reduction in the standard VAT rate.

The conclusion from the analysis is that cutting tourism VAT is one of “the most efficient, if not the most efficient, means of generating GDP gains at low cost to the Exchequer that I have seen with the CGE model”.

Thus, the Government would have a better chance of boosting growth by cutting VAT on tourism in line with our EU competitors rather than other measures to which the Government has declared its commitment, such as reducing corporation tax.

Alas, the Treasury has dismissed the findings from its own model prepared by its own adviser. The campaign is therefore stepping up its lobbying activities by raising awareness amongst local MPs and the general public.

You can help: if you agree that it is unfair that VAT is applied to UK visitor accommodation and attractions at 20% compared to lower rates in nearly every other EU country, please register your support for our campaign, maybe even write to your local MP – you can do this easily by visiting the campaign website: www.cuttourismvat.co.uk . If you operate a tourism business and would like to support the campaign, do please contact me: rgwason@cuttourismvat.co.uk. 

The views expressed in this opinion piece are not necessarily those of the University of Surrey.

About the author

Graham worked for Holiday Which? and in hotels in England, Wales, Germany and Nigeria. He was a tourism and leisure consultant at Deloitte and has been tourism adviser to the House of Lords, the World Travel & Tourism Council and the United Nations World Tourism Organisation. He operates his own five-star gold-award self-catering operation in Somerset: www.cossingtonpark.com.

Graham is also co-founder of All Being Well which provides programmes and coaching for individuals and businesses towards well-being, growth and fulfilment in life and work: www.allbeingwell.com

 

 

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