Tourism Industry: VAT Reduction

Debate between Alistair Carmichael and James Heappey

Wednesday 21st November 2018 Commons Chamber

[Mr Carmichael]

The hon. Gentleman makes the point well. I am aware that Northern Ireland has a particular issue as it shares a land border, a fact that is fairly well discussed at the moment, with the Republic of Ireland. The Republic is one of those countries that in 2011—I will doubtless be corrected if I am wrong—cut their rate of VAT on tourism services to 9%. There is a particular sensitivity about the cross-border issues there, which may assist the hon. Gentleman in making the case, because there is a good working example on his own doorstop of the opportunities that are presented.

I know it is counter-intuitive in the Treasury to suggest that cutting taxes will bring an increased return in revenue, but there is good objective evidence to support that very proposition. I was a member of the Cabinet in 2015 when the Budget cut the rate of spirits duty by 2%. We did that expecting it would result in a reduced return of about £600 million, but we felt it was an important thing to do. In fact, the revenue return as a whole was significantly increased. So having taken the expected hit, we got a better return at the end of the day. This is the same thinking that underpins the Government’s reductions in corporation tax in recent years.

[James Heappey (Wells) (Con)]

The Somerset Tourism Association and Visit Somerset have made representations to me on this matter and they very much agree with the right hon. Gentleman that a reduction in VAT on overnight accommodation and visitor attractions leaves more money in the pockets of visitors to spend on other things during their stay. So the money is not lost to the system; it grows the visitor economy even further.

[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.