Be prepared for further business rate increases

12 September 2005
Be prepared for further business rate increases

The Lyons Inquiry into the future funding of local authorities in England will report shortly. One of the issues that it has been looking at has been the possible introduction of a tourist (or bed) tax as a new means of raising revenue. This has a superficial attraction as it would appear to raise some revenue without having an impact on local residents.

In a written submission, the BHA has tried to head off any consideration of this proposal because hotels, restaurants and tourist attractions already pay significant business rates which, even for the smallest restaurant, is far in excess of anything paid by the largest house in the locality. They also use local suppliers and help keep them afloat, while employing many hundreds of people who contribute to the local economy.

As the Treasury is likely to insist that a bed tax at the suggested level of 5% would be subject to VAT, a hotel stay in an average £60 (exc VAT) UK regional hotel room would carry a total tax of just over £14 per night (an increase of £3.50 per night), giving an overall tax rate of 23.4%. This would add almost £100 to the bill of a family of four staying for a week in a room charging this rate. It would also bring the total tax take near to the highest VAT rate in the EU - Denmark's 25%.

Worse, research by Nottingham University submitted by the Local Government Association, says that a 1% rise in prices relative to other countries leads to a 1% decrease in international tourism. Research by VisitBritain gives a higher (1.4:1) loss ratio for international tourism.

At the same time, a bed tax applied by some local authorities and not by others would be potentially damaging to businesses in affected areas, while the cost of collection, particularly from the average 10-room hotel, would be costly in relation to the return - yet, excluding smaller hotels would be unfair to larger properties. The net result would be to drive up the growing number of visits overseas - 64m in 2004 - while driving down the number of domestic holiday visits (which is already in decline).

Looked at in a wider context, there is an even bigger injustice when it comes to local authority finance. While local authorities are responsible for huge swathes of functions that affect tourism - licensing, planning, street cleaning, traffic management, parking, police and fire, toilets and now the threat of Alcohol Disorder Zones - the businesses that help to fund these activities have no vote in how they are implemented. Yet, through business rates, the hotel industry alone contributes over £500m to local authorities while business rates generally generate billions of pounds. But, if rumours and reports emanating from the Inquiry are to be believed, they will soon be expected to contribute even more in future.

One thing is certain: raising council tax on domestic properties will produce a political backlash. Whatever the Inquiry recommends, any government will be very anxious to avoid that and will seek to minimise such an impact. So in England there will be an almost overwhelming temptation to increase business rates for one simple reason: local residents have votes while businesses do not. Even without a tourist tax, hospitality businesses are likely to feel the pressure in the future. Be prepared.

Bob Cotton
Chief Executive
British Hospitality Association

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