Tourism (VAT)

David Gauke Excerpts

Tuesday 11th February 2014 Westminster Hall

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

It is a pleasure to serve under your chairmanship, Mr Hollobone. I congratulate the hon. Member for South Down (Ms Ritchie) on securing the debate and putting her case so strongly and on the fact that the debate is so well attended. Her constituency is known as one of the most beautiful in the United Kingdom, but I appreciate the strong case made by several other hon. Members for their constituencies to be on that list. In the interest of time, I shall not attempt to comment on each of those areas, but I can reassure hon. Members that the Government appreciate the value and importance of the tourism sector. Ministers from the Treasury and the Department for Culture, Media and Sport have been working closely with the industry to increase inbound and domestic tourism.

VAT is governed by EU law, which strictly limits reliefs. However, as hon. Members have pointed out, VAT law allows member states to implement certain reduced rates of VAT, which are listed in annex III of the VAT directive, at the discretion of the member states. Two of the reliefs are

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

and restaurant and catering services, excluding alcoholic drinks. As several hon. Members have pointed out, when the list of optional reduced rates of VAT entered into force in 2006, the UK opted not to implement those two reliefs and has maintained that position since.

Several other member states have chosen to implement a reduced rate of VAT on tourism, but the Government have yet to find any evidence of a causal link between VAT rates and tourism activity. Comparisons with other countries tend not to take into account the significant VAT reliefs that the UK provides for cultural attractions and public transport, or the other tourist taxes that other member states choose to levy. In addition to the sector-specific reliefs, the UK’s VAT registration threshold is the highest in the EU. Therefore, many tourist attractions do not have to charge any VAT to their customers. It is interesting to note that France, which is often the country quoted as reducing the rate and reaping the rewards, put its VAT rate on restaurant services up from 7% to 10% in January. Also, many businesses in the tourism sector are small businesses and will benefit from the £2,000 cut in national insurance contributions—the employment allowance—that will come into effect in April.

As I mentioned, Treasury and DCMS Ministers have discussed the Cut Tourism VAT campaign, and I have met campaigners and engaged in correspondence with them about the report mentioned by the hon. Member for South Down, among other things. The campaign’s analysis assumes that the revenue shortfall associated with a VAT cut should be met by increasing Government borrowing, but the latest figures from the Office for National Statistics suggest that reducing VAT to 5% for all catering services provided by restaurants, pubs, cafes and canteens would cost the Exchequer between £9 billion and £10 billion a year. Cutting VAT to 5% for accommodation would cost the Exchequer an estimated £2 billion a year. I do not have to remind hon. Members that those costs would have to be met by increasing other taxes, which would be likely to affect growth and jobs adversely elsewhere in the economy, by reducing spending or by increases in borrowing. That would be contrary to the Government’s long-term economic plan and risk raising interest rates, undermining the recovery and adversely affecting families and small businesses.

[Jim Shannon]

Many hon. Members spoke in the debate about the jobs that could be created; the figure for Northern Ireland was almost 15,000. Those jobs would result in taxes being paid and people coming off benefits. What weight has the Minister given to that part of the equation, in the figures he has just outlined?

[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.