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Would a VAT cut help the industry out of recession?

08 January 2010 by
Would a VAT cut help the industry out of recession?

If we are to argue for a cut in VAT on accommodation and meals, writes Bob Cotton, chief executive of the British Hospitality Association, the industry must provide detailed evidence of the likely impact and the benefits. But, he asks, is it the best way to help the industry out of the recession anyway?

With the general election only a few months away, questions are inevitably being raised about the measures that a new government could introduce that would improve the prospects of the hospitality industry. One of the most persistent is a reduction in VAT on either hotel accommodation or restaurant meals or, preferably in the mind of some, both. We need to approach this cautiously.

At a time of economic gloom, when all the efforts of the new government will be directed at cutting public expenditure and raising rather than reducing taxes, it might appear to be perverse to suggest a cut in VAT that specifically helps one industry. Will that not generate pleas from every other, no doubt equally well deserving, industry?

There is, however, strong evidence that tourism is looked upon more favourably in other EU countries than in the UK. The vast majority already impose a lower rate for hotel accommodation, or will do shortly. Far fewer have introduced a lower rate for restaurant meals but recent legislation has only just allowed them to do so; more might soon follow.

Germany, for example, has announced a reduction in its rate of VAT on hotel accommodation from 19% to 7%; last July, France reduced VAT to 5.5% on restaurant meal items, matching its long-standing hotel VAT rate; Hungary has reduced VAT on hotel accommodation from 20% to 18% (but is increasing it on restaurant meals from 20% to 25%).

On restaurant meals, Finland is reducing VAT from 22% to 13% and Belgium will cut it from 21% to 12% in 2010.

All of these reductions have been announced within the last six months or so. Meanwhile, France, Spain and Italy - three of Britain's major tourism competitors - have had a lower VAT rate on hotel accommodation for years, giving our continental competitors an advantage over the UK. So much for harmonisation.

REASONS FOR REDUCTION

So why can't the UK follow suit? One problem is that there is no consensus between the 27 EU countries on the general approach to VAT for tourism businesses. This is because the reasons for introducing a reduction are many and varied.

Governments argue that cuts are designed to encourage consumer spend. In France, however, the reduction to 5.5% for restaurant meals is intended to protect jobs, improve working conditions, encourage investment and promote consumer uptake. It's not yet clear whether any of these objectives have been, or are likely to be, achieved. Press comments suggest not. In Germany, the reduction is the result of a political agreement between the two main coalition partners.

What would be the objective in the UK? At present, and for the foreseeable future, the low value of sterling against the euro and the dollar is a much greater factor in lowering prices to overseas visitors than any realistic cut in VAT.

But would a cut in VAT to, say, 5% help generate stronger home demand? Some say it would and argue that a lower rate of VAT would increase demand and raise turnover, thus increasing the total tax take. This, however, is difficult to sustain. Turnover would need to rise significantly to remain even revenue-neutral to the Treasury - an unlikely development in the present economic situation.

Some have also argued that VAT should be cut for overseas visitors. This would be an administrative nightmare for hotels and restaurants and, in any case, this is precisely the market sector that already benefits the most from the low value of sterling. It would also disproportionately benefit London when provincial hotels need more help.

A MYSTIFYING DECISION

On thing is certain: investment remains critical, which is why the recent government decision to cut back on capital allowances and the hotel building allowance is so mystifying. Any taxation system should encourage all businesses to raise their game and encourage the best businesses to be even better. This is certainly what the hospitality industry needs.

So would the industry have a better case if it argued that any changes in the tax laws should be used, not to try to stimulate demand through VAT cuts, but to encourage businesses to grow by more investment? There is a powerful argument that any measure that encourages investment would have a much longer lasting and more beneficial impact on hospitality businesses than a reduction in VAT.

If the industry is to argue for a cut in VAT, it has to answer a number of questions: what are the overall benefits to the industry, how much of the cut would be passed on to the consumer, how much would demand increase, what is the cost to the Treasury, and what is the likely impact on jobs? So far, we have no precise answers.

The BHA has led many successful campaigns including opposing a bed tax, fighting PPL tariffs through the Copyright Tribunal and lobbying on the National Minimum Wage, but in all these - and other - campaigns we have had a persuasive argument backed by solid evidence.

We would welcome a public discussion to obtain similar evidence to back a campaign to reduce VAT on accommodation and restaurant meals. One thing is certain, however: consensus would be necessary before it could embark on any industry-wide campaign. Realistically, we're not there yet.

The European Commission has estimated that reducing VAT in the UK to 5% for restaurant meals - not including alcohol - would cost the Treasury about £3b. Reducing hotel accommodation to the same level would cost at least a further £1b.

- COUNTRY - Standard VAT rates - VAT on restaurant mealsVAT on hotel accommodationÂ
- Austria - 20%10 % - 10%
- Denmark - 25% - 25% - 25%
- France - 19.6% - 5.5% - 5.5%
- Germany - 19% - 19% - 7%
- Greece - 19% - 9% - 9%
- Ireland - 21.5% - 13.5% - 13.5%
- Italy - 20% - 10% - 10%
- Netherlands - 19% - 6% - 6%
- Poland - 22% - 7% - 7%
- Portugal - 20% - 12% - 5%
- Spain - 16% - 7% - 7%
- Sweden - 25% - 25% - 12%
- UK - 17.5% - 17.5% - 17.5%

- WHAT'S THE BEST WAY TO STIMULATE DEMAND FOR THE HOSPITALITY INDUSTRY?I would like to see the supply-demand equation evened up by allowing ageing and under-invested hotels and bed and breakfast establishments to have easier access to change of use - to residential - so that they can sell up and exit the market and reduce the supply of outdated room stock.

It would have the additional benefit of helping the government address its housing targets, which are not being met. It would also leave better quality hotels standing and open up the opportunity for supply growth when times get better.
Melvin Gold, hotel industry consultant

In the short term, a substantial reduction in VAT for restaurants and bars would help boost revenue and encourage customers to go out more. The rate should go down to 5% and to 10% for hotels and B&Bs, while duty on alcohol should also be reduced by 50% for licensed premises only.

For the medium to long term, more should be done to promote tourism in general and position the UK as the European destination by ensuring it is accessible and affordable for most travellers in these tough times. Therefore, I would reduce or abolish airport tax, actively promote the saving made with the lower VAT and promote various travel incentives within our rail network.
Fred Sirieix, general manager, Galvin at Windows

As the public finances are in such a desperate state, it is unlikely that we would succeed in getting the VAT rate lowered, unless that was adopted as an EU-wide policy instead of just isolated examples, as at present.

However, to really help the hospitality industry, allowing corporate entertainment to be tax-deductible - as it once was - would be an excellent stimulus and probably tax neutral to the Exchequer, as it would mean that restaurants and hotels on the one side would profit from it and pay more tax and VAT, balancing out the effect of a lower take from companies' corporation tax and VAT.
Richard, Earl of Bradford, chairman, The Restaurant Association

VAT reduction greater than 2.5% would make an all-round difference but we shouldn't have to pay so much back anyway. The sector loses out and is at a disadvantage when it comes to claiming back VAT, as we have to pay it on everything we make from sales, whereas other businesses can claim back nearly 60% of their VAT.

It is difficult to know what to suggest when the government itself is so hard up, but a major reduction like, say, introducing a ceiling at 10% or lower, would be fabulous - prices would come down reasonably and make dining out interesting once again.
Cyrus Todiwala, executive chef-patron, Café Spice Namaste

While the government favours stimulation of economic activity as a mechanism for tackling the budget deficit, it is unrealistic to assume it would agree to a cut in VAT in the current economic climate. I suspect that campaigning on this issue would be a waste of valuable energy.

Instead, let's learn from those hospitality operators who have, albeit with difficulty, maintained demand for their products over the last two years. The best way to stimulate demand, to ride the economic storm, and to benefit from customer loyalty is to concentrate on the quality of the product and the guest experience.
Donald Sloan, head of department, Hospitality, Leisure and Tourism Management Business School, Oxford Brookes University

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