Taxing issues

Politically savvy hoteliers will by now be aware that Labour's policy on VAT reduction is noncommittal, despite high-profile announcements of a tax-cut being "under consideration".

Hedging its bets, and presumably voter choice, Labour is citing May 1995's report by accountant Touche Ross on the consequences of reducing VAT from 17.5% to 8% on accommodation only, as strong evidence in favour of the move.

Jack Cunningham, Labour's National Heritage Secretary, said at an Industry Forum Conference on 16 April that Labour is looking into the VAT issue. Later, he told Caterer: "Based on the arguments raised by industry lobbyists and particularly Touche Ross, there appears to be a strong case for reducing the VAT on tourism. But I will not make any promises on tax. My job is to research the issue and offer the industry's case to Treasury. Ultimately, the decision is theirs."

While encouraging, these comments should be seen for what they are. Cunningham did not promise anything, saying Labour has not "researched the issue enough to give a clearer picture".

Disadvantage

At present, the UK is at a competitive disadvantage with other European holiday destinations, with VAT higher only in Denmark. In Germany, VAT is 15%, in the Netherlands, 6%, and in France, 5.5%. Lobbyists have struggled to put their case to the Conservatives to no avail.

The Treasury has justified leaving VAT at 17.5% for several reasons:

• The revenue is vital;

• The tax must remain flat to encompass all industries, and;

• The hospitality industry, particularly in London, is enjoying a buoyant period.

This last point could hinder the industry's case for a VAT reduction with Labour as well.

"Both the British Hospitality Association (BHA) and the British Tourist Authority (BTA) have previously lobbied strongly and the Government has neglected their concerns - that was while the industry was in trouble. Now the industry is almost booming, the case for a VAT reduction is not as strong," says Tim Buss, senior VAT consultant with leisure analyst Pannell Kerr Forster.

The shadow Treasury refuses to give anything more than an acknowledgement of the industry's argument while it is in the midst of conducting a "thorough Corporate Taxation Review". As with most Labour policies, Tony Blair's party is keeping its hand close to its chest and will not disclose tax policy initiatives until "closer to the election".

Neither the shadow Treasury nor Cunningham will comment on whether the issue will be contained in the party's election manifesto.

Buss believes Labour may include the issue in its manifesto but could also delay implementation until the next economic downturn. Labour's enthusiasm for European uniformity could also play a role, as VAT on the Continent is much lower than in the UK. Furthermore, Labour is unconcerned about a flat rate being maintained across all industries, says Buss.

Labour has shown far more enthusiasm than the Government over reduction of VAT, according to Jeremy Logie, chief executive of the BHA, which lobbies on the catering industry's behalf. While Logie is reluctant to comment on the likelihood of a VAT reduction on accommodation, he has faith that change will occur in the face of such a strong case. "I hope the Government, be it Tory or Labour, will realise the logic of reducing the VAT on accommodation," he says.

The BHA lobbied both parties on VAT issues using the Touche Ross report. Based on consumer and internal industry surveys, the report found most hoteliers would pass on at least half the VAT reduction to consumers in the form of lower room rates and this price-drop would attract an extra 2.5 million overseas visitors and seven million domestic tourists a year within four years.

If the VAT were reduced on visitor accommodation only, the industry would create 38,000 new jobs, generate an extra £1b in foreign exchange earnings and earn an extra £419m for the Chancellor of the Exchequer.

While each customer would pay less tax on accommodation, the higher customer volume would offset any Treasury losses. Furthermore, through increased Corporation Tax revenue, the Chancellor would gain. Touche Ross stresses the industry's strongest case lies in arguing for a VAT reduction on accommodation only, because the Treasury would suffer if VAT were reduced on all tourism expenditure.

A VAT reduction is probably more than a faint hope but as it is likely to be on accommodation only and unlikely to take effect for a few years, hoteliers have mixed views on its probable impact.

All segments of the market, be they budget, business or first class, are showing evidence of price-sensitivity, says Pannell Kerr Forster chairman Alan Hopper, further underlining the "importance of a VAT reduction". All areas of the country would see a benefit from the cut and it should stimulate all market sectors.

The Excelsior hotel in London's Heathrow has a diverse array of business, and its management has already noticed its customers' attention to costs.

"With all of my hotel's customers, price is crucial and has become more so over recent years. The last recession taught people how to budget," says general manager Peter O'Meara.

While hotel business is currently buoyant, O'Meara believes a lower VAT is crucial. "Occupancy has improved over the past few years for various reasons, including stronger domestic demand and a favourable exchange rate. But the industry cannot rely on these external factors remaining positive."

The domestic market could see the largest effect as it can be cheaper to travel abroad than to remain in the UK for a holiday, Hopper points out. "The UK is in the ludicrous situation where it is cheaper to travel abroad than have a packaged home holiday. Reducing VAT will help to remedy this situation."

Greater value for money

From an international perspective, lower VAT resulting in cheaper rooms could represent greater value for money to the all-important rapid growth, high-spending East Asian market, says Linda Tuttiett, who heads the BTA's Asia Pacific Department.

"Asians see the UK as an expensive holiday destination, even compared with [the rest of] Europe, and this is turning them away. Cheaper rooms will mean cheaper packaged tours and better value for money," says Tuttiett.

But better value for money does not have to come from cheaper rooms. Short-term profits from the reduced VAT could be reinvested to upgrade and target special, high-spend markets. Or instead of lowering room rates, hotels could upgrade facilities to cater for a new market.

The proposals are not without their faults and Hopper acknowledges the possibility of supply outstripping demand and overheating the industry. However, he stresses that sustained profitable growth must come from the home market.

"Healthy industry performance is based on strong domestic demand and a lower pound. These are cyclical factors that can and will eventually change," says Hopper.

The hospitality industry, having made its case for reduced VAT on accommodation, must now hope that Labour's interest is not solely pre-electoral, but genuine.