Tourism (VAT)

Baroness Ritchie of Downpatrick Excerpts

Tuesday 11th February 2014 Westminster Hall

[Ms Margaret Ritchie (South Down) (SDLP)]

I am pleased not only to have secured the debate but to serve under your chairmanship, Mr Hollobone. I am pleased that the Minister is here to listen and to respond. I thank my co-signatories to the debate, my friends the hon. Members for Brighton, Pavilion (Caroline Lucas), and for Strangford (Jim Shannon). I am pleased to see an excellent turnout from MPs across the UK and across the House, which reflects the importance of the debate. I offer an apology from my hon. Friend the Member for Foyle (Mark Durkan), who is on a Public Bill Committee on consumer rights this morning. During the past couple of years, he has submitted an early-day motion on the subject, and tabled an amendment to a Finance Bill on the issue.

A reduction in VAT is important for tourism, which is a vital industry across these islands; it provides 10% of GDP and supports more than 2 million jobs in the UK. In Ireland, the industry employs some 180,000 people and generates an estimated €5 billion a year. There is potential for significant growth in the sector, especially in Northern Ireland, and that growth would boost associated industries and the wider economy.

Those who come to the UK as tourists spend money in our hotels, pubs, restaurants and shops. They bring economic life to areas that have struggled in the recent economic climate. However, the tourism industry was hit particularly hard by the higher rate of VAT introduced by the Government, and no alleviation has been offered. It is common practice across the EU for member states to introduce sector-specific cuts for the tourism industry, which some offer for accommodation rates, some for tourist and cultural attractions and some for restaurant charges. The UK is one of only four states that ignore all those options. As a result, the industry in Britain and Northern Ireland confronts one of the worst policy regimes possible.

[Roger Williams (Brecon and Radnorshire) (LD)]

I congratulate the hon. Lady on securing the debate. Small hospitality businesses in my constituency are afraid to go above the threshold for VAT registration for fear of having to pay a rate of 20% on their income. Does she agree that reducing the VAT rate would encourage such small businesses to expand?

[Ms Ritchie]

I thank the hon. Gentleman for his helpful intervention, and I completely agree with him. In our nearest neighbour, the Republic of Ireland, VAT on tourism products is now 9%. Even in the difficult economic climate that the Republic has experienced—it has just come out of the bail-out situation—the VAT rate reduction has underpinned businesses in the tourism sector and encouraged new ones to emerge.

[Mr Nigel Dodds (Belfast North) (DUP)]

I, too, commend the hon. Lady and her colleagues on securing this important debate. To be parochial for a moment, in Northern Ireland the problem is our land frontier with the Irish Republic where, as she has just mentioned, there is a lower rate of VAT. Is that not a particular issue for the Province, given people’s propensity simply to go south to enjoy better VAT rates?

[Ms Ritchie]

I thank the right hon. Gentleman for his very helpful intervention. I absolutely agree with him. My constituency borders County Louth in the Republic of Ireland. Many people come to the island of Ireland via Dublin airport, where there will be a zero rate of air passenger duty from April this year. The lower VAT rate on tourism products encourages many of them to use their purchasing power on accommodation and restaurants in the Republic of Ireland, rather than travelling north, where they would have an opportunity to invest in our local economy.

As a labour-intensive industry, the tourism sector is a leading employer. In particular, it offers younger people entry-level jobs at the start of their careers, and more than 44% of people employed in the sector are less than 30 years old. We face a youth unemployment crisis, with more than one in four young people out of work, and the Government’s lack of support for the tourism sector is clearly impairing job creation. A cut in the rate of VAT would create demand, which would spur job creation and go some way towards reducing youth unemployment. In Ireland, the VAT cut for tourism has produced an extra 10,000 jobs in just over a year. A prominent report on the subject published by Deloitte produced evidence that a similar tourist VAT cut in the UK would create some 80,000 jobs.

[Mr Geoffrey Cox (Torridge and West Devon) (Con)]

I congratulate the hon. Lady on securing this extremely important debate. I represent an area of the south-west that is affected by flooding. Does she empathise, and does she agree that if the Chancellor considered a cut in VAT, it would be a hugely welcome boost to the thousands of small tourist businesses on which the economy of the south-west depends, and that it would help those who are shivering in the midst of the flooding?

[Ms Ritchie]

I thank the hon. and learned Gentleman for his helpful intervention. My colleagues from Northern Ireland and I offer our sympathy, support and empathy to the people of the south-west. My aunt used to work in the hospitality industry in Plymouth many years ago, so I know it quite well. I suggest to the Minister that a cut in VAT would help those who are struggling economically, financially and emotionally at this difficult time.

[Mr George Howarth (Knowsley) (Lab)]

I congratulate the hon. Lady on securing the debate and on the forceful way in which she is putting her case. Does she agree that attractive tourist destinations such as Northern Ireland and Merseyside are being hampered competitively by the arrangements elsewhere in Europe that she has described?

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[Ms Ritchie]

The right hon. Gentleman is absolutely correct. Other countries in the EU, including Belgium, the Netherlands and Germany, have much more competitive rates. In France, for example, there is a banking agreement between the Government and the industry. Such measures help to attract visitors and ensure that the money they spend is invested in the local economy.

[Tim Farron (Westmorland and Lonsdale) (LD)]

I congratulate the hon. Lady on securing this incredibly important debate. She mentioned the possibility that a VAT rate reduction for the tourism industry would lead to increased job creation. Would she recognise that many people in the tourism industry—particularly in places such as my constituency, the Lake district, and the Yorkshire dales—are desperate not only to create more jobs but to ensure that jobs are better paid and that a living wage can be paid to people working in the tourism industry? Does she acknowledge that a cut to a fairer level of VAT would help to make tourism a more high-wage industry?

[Ms Ritchie]

I thank the hon. Gentleman for his intervention and I agree with him. Many jobs in the tourism sector are quite low paid, but if there was a level playing field in taxation rates, that would afford the opportunity for employers to pay better rates. It would also ensure that people have confidence and trust, and would allow them to do a better job in promoting their local areas.

I would like to make a little progress. Will the Minister robustly consider the case for a reduction in VAT on hotel accommodation and visitor attractions from 20% to 5%? Would he also consider broadening that out in future to the wider hospitality sector, including to food served in pubs and restaurants? That would encourage many more foreign visitors and provide an incentive for staycations in the domestic market. It would boost coastal resorts, rural retreats and cities and towns that have been hit hard by the economic downturn since 2008.

The industry is significantly constrained by its lack of price competitiveness. The Chancellor is not long back from Davos. While there, he may have learned that the World Economic Forum places the UK in 138th place for price competitiveness for tourism, out of 140 countries. The UK sits at the bottom of the international league table, with businesses facing the challenge of the highest rates in the world for VAT, air passenger duty and visa charges. The purpose of today’s debate is not to rehearse the arguments on issues such as air passenger duty, but that placing shows that the Government’s lack of action on VAT forms part of a broader lethargy when it comes to supporting the tourism industry.

The Government say that visitor numbers remain strong, but I would suggest that that is in spite of the current pricing policy, rather than because of it. The UK’s balance of payments for tourist products has declined steeply in the past 15 years, making it clear that tourism growth has not been what it could have been in recent years, and that we are not maximising the industry’s enormous potential to deliver revenue and jobs. I would argue that the blame for that lies with the policy regime, which is holding back the industry’s potential. Any argument from the Government based on the cost of a VAT cut being prohibitive is highly dubious.

There is strong evidence from the Treasury’s own economic modelling, as used by Professor Adam Blake in a study for the British Hospitality Association, that a VAT cut for the sector would benefit the whole economy. Yes, there might be a loss of some £640 million in the first year, but that would be comfortably offset by years 2 and 3 of the programme. Figures show that a 15% cut in tourism VAT would quickly become revenue-neutral and would result in a radically increased tax take of £2.6 billion over 10 years, delivering a £4 billion boost to the gross domestic product. I repeat: those figures do not come from the industry or lobbying consultants. They are derived from the Treasury’s own internal economic models.

[Mr Laurence Robertson (Tewkesbury) (Con)]

The hon. Lady will be aware that alongside this debate and campaign there is great concern, as expressed in the main Chamber just a few days ago, about the plight of struggling pubs, many of which are closing each and every week. There are a number of issues behind that. Beer taxation, which the Government started to address, is certainly one of them, but VAT is hampering that industry as well, particularly when pubs survive through the food that they provide. Does the hon. Lady agree that one way to help pubs, which are a vital part of the tourism industry, would be to consider how they are affected by VAT?

[Ms Ritchie]

I thank the hon. Gentleman, who is the Chair of the Northern Ireland Affairs Committee, for his intervention. I agree with him on that point, but I see restaurants and pubs that serve food as being further down the line, so to speak. Nevertheless, I do not disagree with his point, because we must invest in local economies and jobs throughout the UK.

[Mark Field (Cities of London and Westminster) (Con)]

The hon. Lady will appreciate that my constituency attracts a huge amount of tourism, being right in the centre of London. I therefore have some sympathy with a lot of what she says—a number of operators have lobbied me on the matter. However, she recognised and referred to the idea that the Treasury would potentially lose money in the short term. She mentioned some specifics on which she would want immediate action—tourist attractions and accommodation—but does she not recognise that if we include other things, such as pub food, we are looking at a very uncertain tax break? It could cost considerably more money at a difficult time for the public finances. Is it not therefore important that she focuses specifically on measures that will have the maximum benefit for the UK’s tourism industry, without negative effects on the public purse?

[Ms Ritchie]

I thank the hon. Gentleman for his intervention. Although I understand that at this stage the focus must be on accommodation and visitor attractions, it would be wrong not to pursue the Treasury and the Minister to try to ensure that we get a better deal for our tourism industry and the wider population we represent.

It might be helpful if I gave a little information from the British Hospitality Association and the Cut Tourism VAT campaign. The Government have asserted that they cannot afford to take a loss on VAT income. It is worth pointing out, however, that the direct loss of VAT incurred by a reduction for visitor accommodation and attractions would be £1.2 billion. Half of that loss would be made good within the first year via savings from social security benefits—more people would be employed—and increased tax yields, principally from employment-related taxes. The year 1 deficit would therefore be £645 million.

[Stephen Lloyd (Eastbourne) (LD)]

rose—

[Ms Ritchie]

I will take a final intervention.

[Stephen Lloyd]

I thank the hon. Lady for giving way, and for securing this debate. Professor Blake said that he felt that a VAT cut would be

“one of the most efficient, if not the most efficient, means of generating GDP gains at low cost to the exchequer”

that he had seen, under the Treasury’s own model. Furthermore, a week or so ago I had a comprehensive meeting with VisitBritain and was reminded that such a reduction would create 80,000 new jobs. That would make a significant difference and neutralise the cost to the Treasury, exactly as the hon. Lady says.

[Ms Ritchie]

I thank the hon. Gentleman for his helpful intervention. It is worth pointing out that Professor Blake used the Treasury’s model for the research that resulted in his recommendation that the focus of a VAT cut be on accommodation and visitor attractions.

I would like to make a little more progress. I would like the Minister to clarify whether the Treasury accepts the figures resulting from its modelling, and whether it contests that this measure would be revenue-neutral and bring a long-term benefit, in terms of tourism numbers, tax revenue and job creation. If the Minister has figures that dispute that, I think everybody would be grateful to see them.

I would like to set the issue in the EU context. Even if the Government concede that the cost would not be excessive, they frequently argue that if such a cut was granted to the tourism sector, every other industry would be queuing up to get a similar cut. That is simply not the case. The EU has already established that the tourism industry is one of very few labour-intensive services that would be eligible for a reduced rate of VAT. Strikingly, the vast majority of other EU member states, which appreciate the importance of the industry, have exercised that right, but not the UK. As was pointed out in a report by Deloitte in 2011, the UK is the only country in the EU that does not apply a reduced rate of VAT to some part of its tourism sector.

The UK is one of only four of the EU’s 27 member states that do not take advantage of the reduced VAT rate on visitor accommodation, one of only 14 that apply the full VAT rate to admissions to amusement parks, and one of only nine that apply the full rate to admissions to cultural attractions. Thirteen countries, including Ireland, also have a reduced VAT rate for restaurant meals. That is not a record of which the UK can be proud. We hear much from the Government about how they are constrained and restrained by Brussels; here is a perfect example of where the Government have the right to be flexible, but they have so far refused to exercise that right.

Other countries are a rich seam of information on the benefits of a cut. It is no coincidence that after such measures are implemented, countries tend to stick with them. If we compare Ireland and the UK, we see a tale of two Governments. The introduction of a 9% VAT rate for tourism-related business and services made 2013 the most successful year since the financial crisis for Irish tourism, with visitor numbers up 10% and more than 9,000 jobs created.

[Tessa Munt (Wells) (LD)]

The Minister will know of my passion for caravans, because there are so many in my constituency. I thank him for the work that he did last year to ensure that the proposed VAT rate on caravan sales was dropped from 20% to 5%, which has saved the industry in my area and other parts of the UK. I ask him to consider a tourism-related VAT cut in exactly the same vein. Holidaymakers’ loyalty to the UK, holiday businesses’ investment in the UK, and the passion for people felt by tourism staff, of whom I was one for a decade, deserve to be rewarded with a sensible approach to this issue.

[Ms Ritchie]

Yes, that is what many of us are saying. We are making a special plea to the Treasury for a sensible approach that ensures growth in our local economies.

In conclusion, to take the case of Ireland, north and south, the island is marketed as one area, but it has two different taxation regimes and two different rates of tax on tourism products, including both visitor attractions and accommodation. We believe that that needs to be synchronised in some measure. I hope that the Minister sees that there is a strong case for a VAT reduction for accommodation and attractions. It could subsequently be widened to include food served in pubs and restaurants, which forms an integral part of our wider tourism sector. That would send a strong message of support to the tourism industry and, importantly, enable it to compete on a more even basis with other European nations, which have almost unanimously introduced such measures. I know that the local tourism industry in Northern Ireland—particularly in my constituency, where wonderful work is already being done—would welcome it with open arms.

There are many MPs here from England, Scotland and Wales, and I know, having talked to some of them, that they would also welcome such measures to pump-prime and grow the local economy, and enable the tourism industry to invest in growth and jobs. This Government talk a great deal about creating growth in the private sector, delivering jobs and supporting local businesses. Here is a ready-made policy that could be implemented quickly and would deliver instant results. I hope that we have a full and frank debate about the issue, leading up to the Minister’s response and, hopefully, to some better news in the Budget report on 19 March.

[Several hon. Members]

rose—

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[Mr Gauke]

I reiterate that funding the cut by additional borrowing would be contrary to our long-term economic plan to get the deficit down and put our public finances in a credible position. It would entail a risk to the recovery. As all hon. Members know, the Government’s priority is to tackle the record budget deficit decisively but fairly and to restore confidence in the economy and support the economic recovery. The conclusion that we reached, therefore, which I announced in Parliament last year, is that a VAT cut would not produce sufficient economic growth to outweigh the revenue shortfall. I have not seen any new evidence since then that has led me to revisit that conclusion, so, at present, the Government have no plans to introduce a VAT cut for the sector.

[Ms Ritchie]

The Minister will be aware of the report of Professor Adam Blake, who I understand is a Treasury adviser, and who used the Government’s computable general equilibrium model and maintained that it would be possible for a reduction in VAT on tourism to end up fiscally neutral. Has the Minister a comment to make on that, and did he talk to Professor Blake about the report and to Deloitte?

[Mr Gauke]

I think that I have touched on that, but I want to emphasise that the figures produced by the industry and Professor Blake represent independent research; the Treasury has engaged with the campaign and has concluded that VAT cuts would lead to a significant revenue shortfall. I could go into more detail about the modelling, but because of the time I will not. We do not accept the conclusions that the hon. Lady refers to.

A more targeted VAT cut, on a regional basis, is not possible under EU VAT law, because a single rate of VAT for a particular good or service must apply throughout a member state. A reduced rate for Northern Ireland is not possible, and it is also not possible to distinguish between tourists, locals and people on business who use a restaurant or hotel. However, I reassure hon. Members that we recognise the importance of the tourism industry and remain committed to a wide range of measures to support the sector.

Since 2011-12, we have put £37 million into the tourism pillar of the GREAT campaign, which in 2012-13 generated a return of more than 400,000 visits to the target cities; those visits brought in £200 million, which is a return of 8:1 on the investment. Between 2011 and 2015, we are spending £50 million on a tactical marketing campaign via VisitBritain, with a further £50 million match-funded by the private sector to market what the UK has to offer overseas. Between 2011-12 and 2014-15, we are spending £10 million on a campaign to encourage domestic tourism, which has already generated about £300 million in additional spending. There are also good results in Northern Ireland, where in the 12 months to September there was an 8% increase in the number of visits compared with the previous 12 months.

We are taking action to help the tourism industry, but a cut in VAT would be expensive and would create a revenue shortfall. That would put the Government’s economic credibility and long-term economic plan at risk.