Rt Hon George Osborne MP
Chancellor of the Exchequer
HM Treasury
1 Horseguards Road
SW1A 2HQ

Ref: ML.C0010.ID.25.11.13

Date: 25 November 2013

Dear George,

I am writing to you regarding the campaign to reduce VAT to 5% for tourism services.

Back in September, during the conference season, the Prime Minister answered a question on this subject at a public forum in Manchester.  He rightly made the point that every industry would like to see a cut in VAT, and that it was necessary to put forward a very strong case.

The purpose of this letter is to try and put that case forward to you.  I know that the Treasury receives request from many industries, but tourism is one of few sectors allowed, under EU rules, to benefit from a reduce VAT rate precisely because it is such an internationally competitive and price sensitive market.

There is a particularly good case for the tourism industry to get a VAT reduction for three key reasons, the policy would:

1. job creation
2. help meet the Government’s objective of boosting GDP and do so on a fiscally neutral basis
3. end the current competitive disadvantage to the UK in comparison with the rest of the EU.

The Economic Case

I am aware that HM Treasury has responded to a number of representations this year with the same standard reply. This section answers the points made in that letter with evidence from the report of Treasury adviser Professor Adam Blake, using the Treasury’s own economic model. Professor Blake has concluded that a reduction for accommodation and attractions would be “one of the most efficient, if not the most efficient, means of generating GDP gains at low cost to the Exchequer.”[1]

The standard HM Treasury replies states that a cut in VAT for accommodations and attractions would have an estimated cost of at least £1.2 billion a year to the Exchequer.  However Professor Blake and the consultants to the Campaign found that “based on reasonable and plausible assumptions, the modelling exercise seems to support a general case that a reduction of VAT on tourism services would be fairly close to fiscal neutrality.” and show substantially higher GDP gains, peaking at £4 billion per year.

An earlier piece of research by Deloitte/Tourism Respect, based on comprehensive research, including case studies of tourism VAT changes in other countries and detailed analysis of the price sensitivity of UK tourism, was completed in 2011. It found that the measure would deliver £2.6bn in extra revenue to the Treasury over a decade and create 80,000 jobs over 2/3 years.

The Tourism industry also stands out as the only UK export earner subject to VAT. I know this Government is keen to reduce the trade deficit and increase exports. Whilst inbound tourists may not be perceived as a traditional form of export, the money they spend already adds up as the UK’s sixth largest export earner. Reducing VAT for the sector would help improve our trade balance.

Jobs – particularly for young people

Reducing VAT to 5% on tourism services will support sustainable and long-term job creation in the UK.  The tourism industry is labour-intensive and spread all over the UK, employing men and women at all levels in part-time and full-time jobs.

It is noteworthy that 44% of those employed in tourism are under 30 (compared with the national average of 24%).  It is, therefore, anticipated that cut a in VAT would particularly encourage employment opportunities for young people.

As you may be aware, the tourism industry has expressed a willingness to consider entering into a collaborative agreement, along the lines of the French ‘Contrat d’avenir’. This includes taking on long-term unemployed people, as well as increased investment in training and product improvements.

Current competitive disadvantage with Europe

The EU permits reduced VAT to be applied to only a limited number of goods and services.   This includes tourism, yet we are behind the curve in taking advantage of this.

HM Treasury argues that it sees “no causal” link between VAT rates and Tourism activity - in this opinion it is very much within a minority within the European Union.  Out of 28 EU Member States, only four (Denmark, Lithuania, Slovakia, and the UK) do not take advantage of a reduced rate of VAT on visitor accommodation.

The UK is one of only 14 EU countries that apply the full rate of VAT on admissions to amusement parks and one of only 9 countries that apply the full rate on admissions to cultural attractions.

In October the Irish Government renewed its 9% reduced rate for tourism with the Irish Minister for Tourism, noting “It has helped to drive an increase in overseas tourist numbers and revenue due to an improved perception for value for money in Ireland which has in turn helped to create between 10,000 and 25,000 new jobs depending on which study you provide.”

I know that the campaign here in the UK is currently focussing on achieving the VAT reduction for hotel accommodation and visitor attractions.  Nonetheless, it is still interesting that 13 countries in the EU have a reduced VAT rate for restaurant meals.

Research in Europe confirms that the tourism industry is highly price sensitive, with high levels of taxation reducing our competitiveness. Please find attached a list of relevant research papers. This year the World Economic Forum rated the United Kingdom 138th out of 140 countries on price competitiveness in their Travel and Tourism Competitive Index[2]. Of those countries that have taken advantage of reducing VAT on tourism services, eg  Germany, Finland, Ireland, Belgium and France, a cut was shown to have stimulated investment, created jobs, and improved GDP.[3]

Reducing tourism VAT to 5% would encourage more domestic holidays, with the added advantage of all the sustainability benefits that this brings.  With families paying such a high price in VAT for UK hotel accommodation and domestic visitor attractions, the UK’s current VAT rates no doubt have a big impact on decisions to holiday in Europe rather than at home.

To conclude, I hope you will seriously consider the benefits to the UK of a VAT cut on tourism services.  I believe the arguments are compelling; not only in terms of increased UK competitiveness, but in long-term and sustainable job creation (all over the UK) and in returns to the Treasury.

I look forward to your response to this letter and I have also copied in the Exchequer Secretary to the Treasury, David Gauke MP.

Yours sincerely,

Cc David Gauke MP, Exchequer Secretary to the Treasury