Conference Countdown 2015: Cutting VAT for tourism would be a costly mistake

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In the run-up to Autumn Conference in Bournemouth, we’ll be looking ahead to examine the highlights in the debating hall, the fringe and training rooms. You can find the papers here. You can find all the posts in the series here.

One of the motions at conference is for reducing VAT on tourism as far as possible. Here’s why that’s a bad idea.

The idea is to reduce VAT on hotels and selected attractions from the standard rate of 20% to 5% – the minimum allowed by the EU. This is something the British Hospitality Association has been lobbying the Treasury on for years. The motion refers to the importance of tourism more generally, with figures that include all restaurants, pubs and outbound flights, amongst other things, but I assume its VAT proposal is (mercifully) more limited.

The government’s response to this lobbying (under both Labour and the Coalition of which we were a part) has been to point to the substantial price tag. The cost of cutting VAT for accommodation alone would be £2 billion a year, with amusement parks and similar adding another £200 million. This is serious money. A comparable total would be the cost of the Pupil Premium that Lib Dems fought so hard to introduce.

Of course, the motion claims the tax cut could eventually be revenue-neutral, and they have the industry-commissioned report to prove it. But the Treasury is not short of submissions from people claiming their tax cut or spending increase will “pay for itself”. The Exchequer Secretary last year told Parliament – not for the first time – 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”.

My opposition to this motion is part of a more general worry, that the party and its conferences will slide into the path of easy opposition, forever promising lower taxes and free ponies for all. Perhaps we might win a few votes each time we campaign for a new giveaway, but it just as easily damage perceptions of our honesty and economic competence and shelter us from the difficult trade-offs that are a part of worthwhile politics. It was only four months ago that we campaigned for substantial tax increases and spending cuts, and there are several years of tightening to come.

In this case, the tax cut seems particularly perverse. Firstly, the intention is not to boost global prosperity (as some pro-growth tax cuts can), it is instead simply to tempt people away from other European countries and to spend in this one instead. C’est la vie, perhaps, but I’d like to think an internationalist party can find better solutions than a beggar-thy-neighbour race to the bottom. And how responsive are people to these prices anyway? Do Brits really lament that high UK prices force them to holiday abroad? The UK is indeed near the bottom of the global ‘price competitiveness’ index, but so are all European countries, regardless of VAT treatment, simply because they are rich, high income countries. Despite this, the UK is ranked 5th in the global Travel & Tourism Competitiveness Index that the motion refers to.

Secondly, the people who benefit the most are of course the richest – both visitors from abroad and domestic users of hotels, who (despite all the talk of international attractiveness) I’d guess are the majority here. And the more expensive the hotel, the bigger the tax cut. Or, the richer the area, the bigger the tax cut: London apparently accounts for 54% of the UK’s inbound tourism spending.

The UK already has “one of the world’s narrowest VAT bases”, and liberals should set a very high bar when considering favouring particular forms of expenditure. In this case, we are being asked to favour those who use (or own) hotels at the expense of those who don’t, and what is probably the UK’s lowest skill industry at the expense of all others. Despite the arguments made by the hospitality industry, this is an unfunded, unprincipled and unfair tax cut. Please vote against it.

* Adam Corlett is an economic analyst and Lib Dem member

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22 Comments

  • Richard Underhill 1st Sep '15 - 11:21am

    Adam Corlett is right on both the narrow and the broader points, which makes us more responsible than the current Prime Minister and the current Chancellor.

  • Clare Brown 1st Sep '15 - 12:22pm

    Totally agree. I can’t see how this proposal would change people’s behaviours much. It feels a bit ‘bread and circuses’ to offer the country cheaper hotels when so many are struggling to get food on the the table. I don’t think we struggle to attract foreign visitors either at the moment. Plus as this would be the same tax reduction across the country it probably wouldn’t help to develop tourism in poorer areas.

  • Well said Adam. The motion is uncosted, unfunded and unjustified. At a time when the government is thumping the low paid with cuts to tax credits, I can’t see how this VAT cut could ever be considered a priority.

    The whole point of VAT is that it is meant to be as broad based as possible. All the current exemptions are on the basis that they are ‘essentials’ as an attempt at welfare for low income households. Even if the tourism sector needs special tax treatment and even if we can afford it, it still doesn’t follow that it should be VAT. For instance the creative sector has corporation tax breaks – has this been considered for tourism?

  • Eddie Sammon 1st Sep '15 - 2:11pm

    I’d rather a VAT cut for everyone and fund it with an increase in corporation tax. I just don’t like VAT.

    Best regards

  • David Evershed 1st Sep '15 - 2:37pm

    An excellent article by Adam Corlett.

    I wonder if the motion was prompted by the conference being in Bournemouth and a desire to ingratiate Lib Dems with the locals.

  • Conor McGovern 1st Sep '15 - 2:56pm

    Eddie Sammon, seconded.

  • ‘VAT is a bad tax’ is certainly a more defensible position than the motion at Conference. However it raises £105bn of government revenue. Shifting some of that tax will mean an awful lot of revenue to claim from profits. Let’s also remember that profits end up being used for investment to grow the company, employ more people and increase wages. The OECD’s analysis shows that consumption taxes like VAT harm the economy by much less than corporation taxes. I’m afraid I need to hear a more compelling argument than “I just don’t like VAT”.

  • Eddie Sammon 1st Sep '15 - 4:13pm

    Duncan, well I’m much happier paying taxes on profits than I am on sales. At the moment as soon as you hit the VAT threshold you have to add 20% to your prices in plenty of industries and people don’t think it is fair. A lot of people actually resort to tax avoidance to stay away from it. I would argue that VAT avoidance is rife.

    I’d like to analyse the OECD analysis to see if I can find any flaws in it. Sometimes what works in economic theory doesn’t work in reality.

    Regards

  • Eddie Sammon 1st Sep '15 - 4:15pm

    In fact I should go further. Illegal VAT evasion is rife and one of the reasons is because it is no deemed to be fair at the current levels. My family pay VAT, but there are lots of businesses who don’t.

  • Rob Harrison 1st Sep '15 - 7:18pm

    This is an absolute minefield. It was one of the FDP’s policies in the 2010 election in which it achieved a record result. It badly misfired on the party as it was one of the few policies that they were able to put into affect in the resulting CDU/CSU/FDP coalition. The result was that the party was accused of clientelism, ignoring the interests of other voters, and only being concerned with business. It was in many ways the equivalent of the student loans policy of the LibDems as the party never really recovered from the PR disaster, that was regularly exploited thereafter by the other parties.

  • Eddie Sammon 1st Sep '15 - 7:31pm

    Maybe we could work towards a 10% VAT rate across the board? I don’t mind consumption taxes in principle, but the idea that as soon as you hit the VAT threshold you have to add up to 20% to your prices seems anti competitive.

    Cutting the 20% VAT rate is not only a pro business policy, but a pro consumer one too. We could even increase VAT in some industries to make it a bit fairer, possibly.

  • “In 2013, tourism accounted for 9% of UK GDP (£127 billion) and more than 3.1 million jobs, making tourism the UK’s sixth largest export earner.” [Source: Conference motion supporting notes]

    There is clearly some very poor analysis here, whilst tourism may have accounted for 9% of GDP, no logical basis is given for the conclusion concerning export performance drawn. Yes a significant proportion of the revenues may come from foreign visitors, which mean these revenues should be set in the context of our balance of payments, something that is totally absent from the motion notes.

    Additionally, no evidence is given to give a context and substantiate the statement “The tourism industry was disproportionately affected by the recession”, particularly when you take into account such events as the Tour de France’s visit to Yorkshire in 2014… To me this sound more like an attempt to retain more monies (ie. don’t expect any real price drops if VAT rates were to change) with little effort compared to actually getting out there and selling the UK as a tourist destination…

  • Well argued. I was leaning to vote against this motion, now will definitely do so.

  • Toby Fenwick 2nd Sep '15 - 8:18am

    Well said Adam. This is the worst kind of policy-lite feel good motion that should be summarily rejected.

  • SIMON BANKS 2nd Sep '15 - 9:04am

    A good article. I’ve been critical for vague calls for us not to “retreat into our comfort zone”, which sometimes seem to mean that we should be decently subdued about expressing in policy what we believe in, but in matters like this there is clearly a danger of soft options and trying to be all things to all voters. There might be a case, though, for a selective tourism VAT cut to help tourism in economically-depressed areas. For example, County Durham has a wonderful medieval city, a fascinating museum and beautiful moorland and hill-country small towns. Newcastle-upon-Tyne is a good base for touring the wonderful coastline of Northumberland and Berwickshire, enjoying night-life, exploring the North Pennines and even visiting areas on both sides of the Solway Firth. One of the most pathetically trampled places in the UK, Merthyr Tydfil, is the best town base for the Brecon Beacons. I can imagine some people already set on holidaying in the UK (whether from UK or foreign homes) being influenced by even cheaper prices at this level.

  • Eddie,
    I agree with you about VAT avoidance but for any business that buys and sells things the real VAT rate (and thus what needs to be passed on in higher prices) is 4-14%, as the fixed rates offered by HMRC to small businesses show… the clue is in “value-added”. Of course if you are prepared to claim it back on purchases but not charge it on sales you can save 20%…. But at considerable risk if done on any scale… And of course it suits businesses to point to 20% VAT in the price without mentioning what they are claiming back on purchases..

    on the OP, Britain certainly IS a more expensive place to go on holiday than most of Europe, even developed parts like France. But we should remember that a great deal of hotel revenue is from businesses (or benefits, due to the housing shortage!), not tourists. I don’t see any reason to benefit the hotel sector over any other.

    The place where there really is a huge (relative) subsidy is on flights due to the lack of fuel duty. It is ridiculous when the train is so much more expensive than flying, and not very green either.. I have the feeling we should be either raising more tax from low-cost airlines, or reducing tax on the energy that moves trains (diesel or electricity)

  • George Crozier 2nd Sep '15 - 9:47am

    Good article. I also see complexity issues. How would visitor accommodation and attractions be defined? Are west end shows visitor attractions? What about a famous golf course like St. Andrews? If St. Andrews then why not every golf course? Then what about football matches? Would it cover meals on hotels? If so what about meals out? The pasty tax debate shows how hard businesses can push at the VAT boundaries. This would surely create a plethora of new boundary disputes.

    I can see the motivation behind the motion but am not convinced this would be a sensible way forward.

  • AndrewMcC re: flights

    I would agree these are highly subsidised and would restate a point I’ve made previously in the context of the Heathrow/Gatwick debate: there is no reason why all UK airport slots aren’t ‘owned’ by the government and “licence to use” auctions run every 10~15 years, just as we do currently with radio spectrum and railway franchises. Naturally, a slot is a slot, it is up to an operator to determine if they can make it pay by operating long haul or short haul flights. Similarly the government can take a second revenue cut by adjusting the air passenger duty rates for internal, EU and international flights. The only problem I can see is that once you start trying to move local and EU air traffic on to rail, the daftness of HS2 becomes even more apparent…

  • Eddie Sammon 2nd Sep '15 - 2:40pm

    Thanks Andrew McC. Good point about the effective VAT rate. I still think the 20% gross rate is too high. In finance people partly base their business models on avoiding VAT. Charge a fee and it is Vatable, but take commission and it is not. It can lead to miss selling too. This is how it used to work a few years ago anyway.

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