Tourism Industry: VAT Reduction

Debate between Alistair Carmichael and Henry Smith

Wednesday 21st November 2018 Commons Chamber

[Mr Carmichael]

The hon. Gentleman leads me on nicely to my next point. I was going to try to explain the way in which this reduced level of VAT feeds into other parts of the economy and the effects it can have. It is argued, with some force, that the reduction in VAT can lead to higher employment levels and better wages, which in turn leads to increased income tax receipts. The increased profitability of businesses, some of which are currently marginal and probably not even paying much tax at all, provides the opportunity for greater returns in corporation tax. Eventually, this feeds through to higher expenditure in other sectors—this is the so-called “tourism multiplier”, which goes back to the hon. Gentleman’s point. It is estimated that for an additional £1 spent in tourism we will see another 70p generated in spend in other sectors.

The European Union VAT laws currently require a broad uniformity of VAT and sales taxes across the whole EU, but there is a specific derogation for certain supplies. The list of these derogations is set out in annex III to the principal VAT directive 2006/112/EC. The three items of particular relevance to the tourism sector are items (7), (12) and (12a). For the benefit of the House, let me read those into the record. Item (7) specifies:

“admission to shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and similar cultural events and facilities”.

Item (12) specifies:

“accommodation provided in hotels and similar establishments, including the provision of holiday accommodation and the letting of places on camping or caravan sites”.

Item (12a) relates to

“restaurant and catering services, it being possible to exclude the supply of (alcoholic and/or non-alcoholic) beverages”.

It is important that the House understands that we make this case within a fairly clearly defined area, because the question of what constitutes tourism services, and other such issues, is already fairly well established in European law.

The principle of uniformity, subject to these derogations, is now stretched to breaking point. In Europe, only three countries—the United Kingdom, Denmark and Slovakia —continue to charge the full 20% rate of value-added or sales tax. Every other country charges a reduced rate. Some charge as low as the 5% minimum floor set by EU law, and they range right the way through to 15%. The rate in the Republic of Ireland has now been set at 9%, which has been of concern to operators in Northern Ireland and will doubtless affect the considerations of the hon. Members for Strangford (Jim Shannon) and for South Antrim (Paul Girvan), who are sitting behind me.

I know how the Treasury likes to do these things— I have seen it for myself many times over the years—but I would like to hear from the Minister that there is a willingness in the Treasury to engage with a wider range of people and a wider range of stakeholders. The Cut Tourism VAT campaign commissioned Nevin Associates to produce analysis. Its modelling showed that a cut to 5%—the minimum allowed—could generate £5.3 billion in gains to the Treasury over 10 years.

[Henry Smith (Crawley) (Con)]

The right hon. Gentleman is making a powerful argument and I hope that the Treasury will listen sympathetically. He is right that reducing VAT on tourism would boost the economy, and it would also be a boost to gateways to the UK such as Gatwick airport in my constituency, where many tourists arrive from abroad and benefit the local community. It would certainly help to boost the economy further.

[Mr Carmichael]

That is a good point. In fact, as the representative of a slightly smaller gateway—a significant number of people come in through Kirkwall and Lerwick, especially on cruise ships in the summer months—I can see the opportunities to be had.

As I was saying, the Cut Tourism VAT campaign analysis found that there would be gains of £5.3 billion over 10 years. I hope that that would be subject to pretty robust scrutiny by the Treasury, but it should be taken not as the subject of argument or debate but as the starting point for a discussion between the Treasury and the sector. It seems to me that a significant body of both academic and sectoral opinion says that it would offer opportunities for our businesses to grow and for the Treasury to get more money as a consequence. I do not expect the Minister to stand up and say, “All right, on you go”—I suspect that that moment, were it ever to come, passed with the Budget—but there is still a wide range of opinion on this issue in the House and there is a wide range of support for it throughout the country. It would assist us all, Treasury included, if the Minister was prepared to open the lines of communication and engage with those of us who are making the case.