Tourism Industry and VAT

David Gauke Excerpts

Tuesday 17th March 2015 Westminster Hall

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

It is a great pleasure to serve under your chairmanship this afternoon, Ms Dorries, and to respond to this debate. This is not the first time that I have had the privilege to respond to such a debate. I start by congratulating the hon. Member for Ceredigion (Mr Williams) on securing this debate, and for giving hon. Members an opportunity to discuss this important issue. I also congratulate him on the manner in which he set out his case. His constituency is well-known for being one of the most beautiful in Wales, and indeed in the entire country. I make that point with a degree of concern because I appreciate that, having made it about his constituency, there is a very strong case to make it for many of the other constituencies that are represented here in Westminster Hall today.

Let me reassure the hon. Gentleman and indeed other hon. Members that the Government value the importance of the tourism sector, not only in the hon. Gentleman’s constituency but across the United Kingdom. I will say more about that later, but Ministers from both the Treasury and the Department for Culture, Media and Sport have been working closely with the industry to increase both in-bound and domestic tourism.

On the specific issue of VAT, I should briefly explain that VAT is, of course, governed by EU law and that reliefs from VAT are therefore strictly limited. However, EU VAT law allows member states to implement certain reduced rates of VAT, which are listed in annex 3 of the VAT directive, at the discretion of individual member states. Three of these reliefs are of particular interest today: first, accommodation provided in hotels and similar establishments, including the provision of holiday accommodation and the letting of places on camping or caravan sites; secondly, restaurant and catering services, excluding alcoholic drinks; and, thirdly, admission to leisure attractions, including shows, theatres, amusement parks, concerts, museums, and similar cultural events and facilities.

I know that the hon. Gentleman is aware that a number of other member states have chosen to implement a reduced rate of VAT on tourism and related activity. However, this Government are yet to find any conclusive 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 already provides for cultural attractions and public transport, nor the other tourist taxes that other member states choose to levy.

[Mr Mike Hancock]

I am very interested in the statement the Minister has just made that there is no conclusive evidence to support the argument that a cut in VAT would generate more activity. So, what is the evidence that he is using to say that there would be no improvement, and who produced it?

[Mr Gauke]

I will say a little about that. For example, the case has been made that in the Republic of Ireland there has been an increase in the number of tourists in recent years, since there was a reduction of VAT on the tourism sector there. However, we have seen a very similar increase in the number of tourists in the United Kingdom. So, we should not jump to the conclusion that there is necessarily a causal link.

[David Simpson]

Earlier, I raised the issue of the distortion of VAT payments between certain golf clubs—the disparity between the proprietary clubs and the member-run clubs. Surely that disparity should not exist. If it is a golf club, it is a golf club, and there should be a level playing field. Golf clubs create tourism, food and accommodation.

[Mr Gauke]

The hon. Gentleman leads me to a different debate on the VAT treatment of golf clubs, which I am sure he will understand is a matter of some complexity and indeed of some litigation, too. So, Ms Dorries, I hope you will forgive me, but I will not be too diverted by the particular point that he has put on the record.

In the UK, we apply a zero rate of VAT to food, newspapers and books, and passenger transport. The UK also refunds VAT incurred by many world-famous museums and galleries, making them free to visit for all. In addition to the sector-specific reliefs, the UK’s VAT registration threshold is the highest in the EU, meaning that much tourist accommodation and many attractions do not have to charge any VAT to their customers.

As I have said, Ministers from both the Treasury and DCMS have discussed the Cut Tourism VAT campaign, and recently I have both met and engaged in correspondence with campaigners. VAT raises more than £100 billion a year, which has been critical in enabling us to manage the UK economy through tough economic times, and the latest figures from the Office for National Statistics suggest that reducing the rate of VAT to 5% for catering services, such as the supply of meals, snacks and drinks sold by restaurants, pubs, cafés and canteens, would cost the Exchequer £10 billion per year. Similarly, a cut in VAT to 5% for accommodation would have an estimated cost of around £2 billion a year to the Exchequer. I do not have to remind hon. Members that those costs would have to be met either by increasing other taxes, which may well have an adverse effect on growth and jobs elsewhere in the economy, or by increasing borrowing. That would risk raising interest rates, which would undermine our hard-won recovery and would have an adverse impact on families and small businesses.

[Albert Owen]

The Minister made the comparison with the Republic of Ireland, saying that we have had a comparable increase in the number of people visiting this country. Does he have any comparable figures from the Republic of Ireland that show the boost to the tourism sector there, and if so, is he taking them into account when he talks about the extra revenue that has come into the Irish Exchequer?

[Mr Gauke]

The point that I am making is that the number of tourists in both countries has increased at largely the same rate, at a time when one of them has reduced VAT and the other has not. Of course, these matters can be somewhat complex and there are many factors to consider, and when it comes to tourism matters, and particularly matters affecting in-bound tourists, we should not forget the importance of the exchange rate. It is very significant and, of course, recently the exchange rate has gone in different directions.

[Jim Shannon]

Will the Minister give way?

[Mr Gauke]

I am conscious that, although we have a little bit of time left because of the earlier Division, I should make progress. However, I will give way to the hon. Gentleman.

[Jim Shannon]

If the Minister wants a comparison, he should compare the Republic of Ireland and Northern Ireland. Clearly, the number of visitors to the Republic of Ireland has grown enormously above the number visiting Northern Ireland. That is a clear example of the advantage of a reduced VAT rate. We could all take advantage of that if it happened across the whole of the United Kingdom, and particularly in Northern Ireland.

[Mr Gauke]

As I say, a comparison of the Republic of Ireland with the UK as a whole suggests that there is not a big difference. Indeed, I understand that there has been a pretty positive increase in the number of tourists to Northern Ireland specifically in recent years.

All hon. Members will be aware that this Government’s priority is to tackle our budget deficit decisively but fairly and to restore confidence in our economy. The Government have concluded that a VAT cut would not produce sufficient economic growth to outweigh the revenue shortfall. I have not seen any new conclusive evidence that has led me to revisit that conclusion. So at present the Government have no plans to introduce a VAT cut for this sector.

I reassure hon. Members that the Government recognise the importance of the tourism industry and we remain committed to a wide range of other measures to support the sector. For example, to date we have invested more than £129 million through VisitBritain and VisitEngland, to market great British holiday destinations at home and abroad. This has already leveraged significant private sector investment of more than £84 million. We have announced a £10 million tourism in the north fund in the next financial year. We have announced £2 million in the next financial year, to help promote our cities and regions overseas as part of the GREAT campaign, through VisitEngland.

The tourist industry has benefited from other policies introduced by this Government. I thank my hon. Friend the Member for Aberconwy (Guto Bebb) for making this point. For example, capping business rates and doubling business rates relief benefits the retail and hospitality sector by a considerable sum. Those sectors have benefited from the introduction of the employment allowance and will benefit from the abolition of employer's national insurance contributions for under-21s and for apprentices under 25.

[John Pugh]

I hope that this intervention will help. The Minister is saying clearly to the industry and to hon. Members that he has seen no conclusive evidence. If that is not to be a fob-off, should not he sketch out what conclusive evidence would look like to the Treasury? What is the Treasury actually looking for in evidence that would convince it that this case was valid? If he cannot say that, it will simply look like a stalling move.

[Mr Gauke]

A considerable amount of evidence has been produced. The essence of the case is that we would want to see evidence suggesting that the benefits to the economy outweigh the costs. The costs to the Exchequer are, as I have outlined, considerable. The Cut Tourism VAT campaign acknowledges in the numbers that it has produced—I can go into a little bit more detail on issues that we have with its methodology—that there would be an immediate shortfall. Its argument is that, over time, much if not all of that shortfall would be recovered. However, that immediate shortfall has to be dealt with. There is not the opportunity for us to say, “We can borrow extra billions of pounds to fund this, in the hope that that money will be recovered in future years.” If we undertook such a measure, we would need to replace that shortfall with additional taxes or reduced spending, and that in itself would have an impact upon the economy.

The actions we have taken in support of VisitBritain and VisitEngland and the tax reforms that I outlined, are delivering positive results for the UK tourist sector. Provisional figures for 2014 show that the UK welcomed 6% more visitors than in 2013: a total of 34.8 million. In total, UK tourist spend is also up by 3%, which is a total of some £21.73 billion. Provisional figures for tourism in Wales for 2014—the hon. Member for Ceredigion will be interested—show that more people are holidaying in Wales than ever before, with Wales now accounting for over 12% of holidays in Great Britain, leading to an increase on holiday spend in Wales. I am certain that, on top of the increase in numbers, all the successful events that the UK hosts year on year will only serve to make more people aware of the UK’s desirability as a tourist location.

Wherever we can, the Government will of course continue to invest in tourism and provide support for tourism across the UK. Although the hon. Gentleman, and other hon. Members who spoke in this debate, may be disappointed with my answer on VAT, I hope he and other hon. Members will be reassured that we support the sector; that, wherever we can, we will continue to support it; and that we are confident that both inbound and domestic tourism numbers will continue to rise.