Minister dashes hopes for VAT reduction after Commons debate

11 February 2014 by
Minister dashes hopes for VAT reduction after Commons debate

A Treasury minister and his opposition counterpart have both rejected calls from MPs for a reduction in tourism VAT, following a Commons debate on the issue.

The debate, which took place in Westminster Hall earlier this morning, saw tens of MPs from constituencies across the UK put their case for a reduction in VAT to 5% on hotel accommodation and visitor attractions, which currently stands at 20%.

The debate was organised by Margaret Ritchie, the MP for South Down in Northern Ireland, who, along with several of her colleagues, highlighted the fact that the UK is one of only four EU members not to have reduced the rate of VAT on its tourism industry, either through a reduction of taxation on hotel accommodation, food in restaurants and pubs, or both.

Watched by both Martin Couchman, deputy chief executive of the British Hospitality Association (BHA), which is spearheading the Cut Tourism VAT campaign, and Jacques Borel, the French lobbyist whose VAT Club leads a similar campaign supported by around 40 pub, restaurant, hotel and foodservice companies, Ritchie said: "The government's lack of action on VAT forms part of a broader lethargy in supporting the industry.

"Tourism growth has not been what it could have been in recent years. I argue that the blame for this lies with the current policy regime that is holding back the potential of the industry."

Ritchie claimed that despite the £640m loss in tax revenues that a VAT reduction on hotel accommodation and visitor attractions would bring about in its first year, it would be outweighed by the benefits of increased employment and with it, a boost to income tax and national insurance contributions, as well as a more general economic benefit, in future years. Figures from the Cut Tourism VAT campaign indicate that reducing the tax on tourism to 5% will create 80,000 jobs, many for the young and unemployed, and generate a surplus of £2.6b for the Treasury over 10 years.

Ritchie also highlighted that in her own constituency, hospitality businesses needed to compete on a more level playing field with the Republic of Ireland, where the rate of VAT on tourism was reduced to 9% in 2011, with the creation of around 9,000 extra jobs.

Her comments were echoed by other MPs, including Dr Sarah Wollaston, the MP for Totnes, who said hospitality businesses in her constituency were worried about their lack of price competitiveness as compared with the rest of Europe. She also highlighted the boost to employment that a drop in VAT could bring. "A number of businesses have written to me and said they would like to be able to pay the living wage but are unable to do so at the moment. I have had one very successful business contact me this week to say normally they would be employing far more people. Normally 35 people are employed there, but currently they are down to 27," she said.

And Mark Williams, MP for Ceredigion, added that because the hospitality industry employs a high proportion of young people, a VAT cut would be good for youth unemployment. "There is a real opportunity here for more apprenticeships and young people getting into jobs and moving forward," he said.

Meanwhile, Andrew Bingham, MP for High Peak, said: "If we are competing with France and Spain, then I think we need to compete on a level playing field, not the one we are on at the moment. I appreciate the Treasury is not overdone with cash, but I think we should give this serious consideration."

And Simon Hart, MP for Carmarthen West and South Pembrokeshire, added that while in 2010 the Treasury had a compelling argument in favour of cutting the deficit, it looked less strong four years later, now that the economy is recovering, particularly in light of the fact that several areas of the country which have a high proportion of tourism and leisure businesses had been battered by floods and were in need of support.

Despite these arguments, however, David Gauke, Exchequer Secretary to the Treasury appeared to dash any hope of a VAT reduction. He said: "This government is yet to find any evidence of a causal link between VAT rates and tourism activity."

He warned that ONS figures suggested a reduction in VAT for all catering services to 5% would cost the Exchequer £9b-£10b a year, and that a reduction in VAT to 5% on accommodation would cost a further £2b a year.

He said: "I don't have to remind the honourable members that these costs would have to be met either from increasing other taxes, or reducing spending, or increasing borrowing, which would be contrary to the economic plan that this government has."

He stressed the importance of the tourism sector to the economy, but instead pointed to other measures that the government had undertaken to support it, such as VAT relief on cultural attractions and public transport, as well as the success of the GREAT marketing campaign, to which the government has committed £50m from 2011 to 2015, match funded by the industry.

Gauke's views were echoed by his opposite number, Shabana Mahmood, the Labour MP, and Shadow Exchequer Secretary who argued that her party could not support a policy that would contribute to the government's budget deficit. She said: "I acknowledge the passionately held views of the members present, but it is our position that an incoming Labour government will inherit a difficult financial situation. We believe deficit reduction is a necessary and important part of a successful economic policy. We are determined to deliver the long term changes that we believe our economy needs. We do have to make sure that ultimately the sums need to add up."

Commenting after the debate, Graham Wason, chairman of the Cut Tourism VAT campaign said: "We are delighted at the all-party support shown for reduction in this first debate on Tourism VAT in parliament. It was a fantastic turnout of 28 MPs. All except the Minister responding were convinced of the need for a cut on VAT for visitor accommodation and attractions and many references were made to evidence, using a Treasury approved financial modelling system, the positive impact for the UK economy this would have."

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