Tourism Industry: VAT Reduction

Jim Shannon Excerpts

Wednesday 21st November 2018 Commons Chamber

[Mr Alistair Carmichael (Orkney and Shetland) (LD)]

I am delighted to have obtained this Adjournment debate, albeit slightly postponed. I am grateful to the hon. Members who have remained in their place this evening to take part and to demonstrate that the question of a reduced rate of value added tax for the tourism sector is one that commands cross-party interest and support.

Tourism is the fourth largest sector of the UK economy today and, unlike most sectors, it has a reach across our economy and geography that is hard to equal. Certainly, it is a massively important, and increasingly important, industry in my constituency in the northern isles.

We have previously heard talk of voodoo economics, and tourism is a sector that allows us to apply a little judo economics—that is to say we can use the force of those things that would normally work against us to our favour. In Orkney and Shetland, we have a number of disadvantages due to our geography and the size and sparsity of our population, which are all things that, when it comes to tourism, make us an attractive destination. They are the things that make people want to come to see us in the northern isles. For us, tourism is an enormously important industry, and it is one that has grown massively in recent years.

Tourism also complements many indigenous traditional local industries. For years we have told our fishermen, our farmers and our crofters that they have to diversify or die, and they have taken that message to heart. This does not quite come within what I have to declare as an interest, but my parents’ family farm on Islay, off the west coast, is now in the region of 800 or 900 acres, and it not only supports cattle and sheep, as it has always done. Now, between my sister and my parents, the farm supports four individual self-catering units, which is a good example of how a traditional farming unit has been diversified to take significant income from tourism.

Obviously, tourism fits well with the profile of many communities such as ours, because it allows seasonal and part-time employment, which are both important in communities where people perhaps do not have just one job working 9 to 5, Monday to Friday. People are looking for a range of different income sources—as evidenced by the recent growth in the number of people working as tour guides in both Orkney and Shetland—and such employment offers that sort of opportunity.

In establishing the importance of tourism as an industry, in communities like mine right the way through to where I stand in one of the best-known tourism destinations in the country, the question arises of how we can best seek to allow the industry to grow itself.

[Jim Shannon (Strangford) (DUP)]

I congratulate the right hon. Gentleman on securing this Adjournment debate. He has mentioned the attractiveness of his constituency to tourists. A VAT reduction would definitely benefit tourism in Northern Ireland. In 2017, some 2.6 million out-of-state visitors and more than 2 million Northern Ireland residents took an overnight trip in Northern Ireland, and during 2017 visitors from all markets combined to spend £926 million in Northern Ireland, up £76 million on the previous year. Does he agree that lowering VAT can only encourage more people to make the trip to Northern Ireland or to his constituency, luring people away from the Republic of Ireland by providing unrivalled beauty and attractions with unrivalled pricing? Indeed, the same could be said of the whole United Kingdom of Great Britain and Northern Ireland.

[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.

--- Later in debate ---

[Mel Stride]

I thank my hon. Friend for his intervention. I recognise the sterling work that he does in promoting tourism in his own constituency. He is a constituency neighbour of mine and I am well aware of the good work that he does. He is right: we must do a lot of important things in terms of specifically supporting tourism.

[Jim Shannon]

I thank the Minister for his response so far. It is always a pleasure to intervene on him. Will he acknowledge that one of the great disadvantages that we have in Northern Ireland is the border, to which the right hon. Member for Orkney and Shetland (Mr Carmichael) referred? There is an inflow of tourists going into the Republic of Ireland who take advantage of the 9% VAT rate as against what we have in Northern Ireland. It is about making sure that those tourists and visitors go across the border. Does he see the disadvantage of having the two different VAT rates, and does he also see the advantage of having a reconciled VAT rate, which would mean that we in Northern Ireland could then take bigger advantage of the US visitors who go to the Republic of Ireland?

[Mel Stride]

The hon. Gentleman raises the issue of VAT specifically in Northern Ireland. As he will be aware, we undertook a call for evidence, which we announced at the Budget before last. We have now reported on that and will continue to look at the issue of VAT, although we are currently constrained by virtue of our membership of the European Union, as I will argue later. Northern Ireland actually has some advantages over the Republic of Ireland when it comes to VAT. For example, we have the highest VAT threshold for businesses that have to charge VAT in the European Union and the OECD, including the Irish Republic.

The right hon. Member for Orkney and Shetland mentioned the specific support we provide for tourism. We provide some £60 million per year for our GREAT Britain campaign, £20 million per year of which goes to VisitBritain. Our tourism action plan looks at regulation, transport, skills and all the other things that underpin tourist activity as well as money and taxation. Some £40 million goes to the Discover England fund for promoting tourism outside London.

At the heart of the right hon. Gentleman’s ask is clearly a reduction in VAT, particularly with regard to food and beverages, attractions and accommodation— the areas that he cited when he mentioned the VAT directive and the derogations in items (7), (12) and (12a). The Government recognise the strength of feeling on this matter. We have met campaigners over many years, and I have engaged extensively with Members right across the House. We will keep VAT and VAT on tourism under review, but unfortunately there are some issues from which we cannot hide away. One of those issues is the fact that, if we are to make a change, under the current arrangements with the European Union that change would have to be UK-wide. It would therefore come with quite a hefty price tag.

The Treasury estimates that, in the first year at least—although one recognises there are dynamic effects of reducing taxes, increasing activity and therefore perhaps getting more tax revenue further down the line—we would be looking at a cost of about £10 billion for reducing VAT from 20% down to 5% in the categories that I mentioned. That would be about £7 billion on food and beverages, £2 billion on accommodation and £1 billion on attractions. Some of that loss, or some of the relief that we would be providing, would be dead weight in the sense that it would not necessarily solely apply to supporting tourism.