End of day adjournment debate (Commons) on Tourism Industry: VAT Reduction - Nov 21

I am delighted to have obtained this Adjournment debate, albeit it has been slightly postponed. I am grateful to the hon. Members who have remained in their place this evening to take part and to demonstrate that the question of a reduced rate of value added tax for the tourism sector is one that commands cross-party interest and support.

 

Tourism is the fourth largest sector of the UK economy today and, unlike most sectors, it has a reach across our economy and geography that is hard to equal. Certainly it is a massively important, and increasingly important, industry in my constituency in the northern isles.

 

We have previously heard talk of voodoo economics, and tourism is a sector that allows us to apply a little judo economics—that is to say we can use the force of those things that would normally work against us to our favour. In Orkney and Shetland we have a number of disadvantages due to our geography and the size and sparsity of our population, which are all things that, when it comes to tourism, make us an attractive destination. They are the things that make people want to come to see us in the northern isles. For us, tourism is an enormously important industry, and it is one that has grown massively in recent years.

 

Tourism also complements many indigenous traditional local industries. For years we have told our fishermen, our farmers and our crofters that they have to diversify or die, and they have taken that message to heart. This does not quite come within what I have to declare as an interest, but my parents’ family farm on Islay, off the west coast, is now in the region of 800 or 900 acres, and it not only supports cattle and sheep, as it has always done. Now, between my sister and my parents, the farm supports four individual self-catering units, which is a good example of how a traditional farming unit has been diversified to take significant income from tourism.

 

Obviously, tourism fits well with the profile of many communities such as ours, because it allows seasonal and part-time employment, which are both important in communities where people perhaps do not have just one job working 9 to 5, Monday to Friday. People are looking for a range of different income sources—as evidenced by the recent growth in the number of people working as tour guides in both Orkney and Shetland—and such employment offers that sort of opportunity.

 

In establishing the importance of tourism as an industry, in communities like mine right the way through to where I stand in one of the best-known tourism destinations in the country, the question arises of how we can best seek to allow the industry to grow itself.

I congratulate the right hon. Gentleman on securing this Adjournment debate. He has mentioned the attractiveness of his constituency to tourists. A VAT reduction would definitely benefit tourism in Northern Ireland. In 2017 some 2.6 million out-of-state visitors and more than 2 million Northern Ireland residents took an overnight trip in Northern Ireland, and during 2017 visitors from all markets combined to spend £926 million in Northern Ireland, up £76 million on the previous year. Does he agree that lowering VAT can only encourage more people to make the trip to Northern Ireland or to his constituency, luring people away from the Republic of Ireland by providing unrivalled beauty and attractions with unrivalled pricing? Indeed, the same could be said of the whole United Kingdom of Great Britain and Northern Ireland.

The hon. Gentleman makes the point well. I am aware that Northern Ireland has a particular issue as it shares a land border, a fact that is fairly well discussed at the moment, with the Republic of Ireland. The Republic is one of those countries that in 2011—I will doubtless be corrected if I am wrong—cut their rate of VAT on tourism services to 9%. There is a particular sensitivity about the cross-border issues there, which may assist the hon. Gentleman in making the case, because there is a good working example on his own doorstop of the opportunities that are presented.

 

I know it is counter-intuitive in the Treasury to suggest that cutting taxes will bring an increased return in revenue, but there is good objective evidence to support that very proposition. I was a member of the Cabinet in 2015 when the Budget cut the rate of spirits duty by 2%. We did that expecting it would result in a reduced return of about £600 million, but we felt it was an important thing to do. In fact, the revenue return as a whole was significantly increased. So having taken the expected hit, we got a better return at the end of the day. This is the same thinking that underpins the Government’s reductions in corporation tax in recent years.

The Somerset Tourism Association and Visit Somerset have made representations to me on this matter and they very much agree with the right hon. Gentleman that a reduction in VAT on overnight accommodation and visitor attractions leaves more money in the pockets of visitors to spend on other things during their stay. So the money is not lost to the system; it grows the visitor economy even further.

The hon. Gentleman leads me on nicely to my next point. I was going to try to explain the way in which this reduced level of VAT feeds into other parts of the economy and the effects it can have. It is argued, with some force, that the reduction in VAT can lead to higher employment levels and better wages, which in turn leads to increased income tax receipts. The increased profitability of businesses, some of which are currently marginal and probably not even paying much tax at all, provides the opportunity for greater returns in corporation tax. Eventually, this feeds through to higher expenditure in other sectors—this is the so-called “tourism multiplier”, which goes back to the hon. Gentleman’s point. It is estimated that for an additional £1 spent in tourism we will see another 70p generated in spend in other sectors.

 

The European Union VAT laws currently require a broad uniformity of VAT and sales taxes across the whole EU, but there is a specific derogation for certain supplies. The list of these derogations is set out in annex III to the principal VAT directive 2006/112/EC. The three items of particular relevance to the tourism sector are items (7), (12) and (12a). For the benefit of the House, let me read those into the record. Item (7) specifies:

 

“admission to shows, theatres, Circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and similar cultural events and facilities”.

 

Item (12) specifies:

 

“accommodation provided in hotels and similar establishments, including the provision of holiday accommodation and the letting of places on camping or caravan sites”.

 

Item (12a) relates to restaurant and catering services, it being possible to exclude the supply of (alcoholic and/or non-alcoholic) beverages. It is important that the House understands that we make this case within a fairly clearly defined area, because the question of what constitutes tourism services, and other such issues, is already fairly well established in European law.

 

The principle of uniformity, subject to these derogations, is now stretched to breaking point. In Europe, only three countries—the United Kingdom, Denmark and Slovakia—continue to charge the full 20% rate of value-added or sales tax. Every other country charges a reduced rate. Some charge as low as the 5% minimum floor set by EU law, and they range right the way through to 15%. The rate in the Republic of Ireland has now been set at 9%, which has been of concern to operators in Northern Ireland and will doubtless affect the considerations of the hon. Members for Strangford (Jim Shannon) and for South Antrim (Paul Girvan), who are sitting behind me.

 

I know how the Treasury likes to do these things— I have seen it for myself many times over the years—but I would like to hear from the Minister that there is a willingness in the Treasury to engage with a wider range of people and a wider range of stakeholders. The Cut Tourism VAT campaign commissioned Nevin Associates to produce analysis. Its modelling showed that a cut to 5%—the minimum allowed—could generate £5.3 billion in gains to the Treasury over 10 years.

The right hon. Gentleman is making a powerful argument and I hope that the Treasury will listen sympathetically. He is right that reducing VAT on tourism would boost the economy, and it would also be a boost to gateways to the UK such as Gatwick airport in my constituency, where many tourists arrive from abroad and benefit the local community. It would certainly help to boost the economy further.

That is a good point. In fact, as the representative of a slightly smaller gateway—a significant number of people come in through Kirkwall and Lerwick, especially on cruise ships in the summer months—I can see the opportunities to be had.

 

As I was saying, the Cut Tourism VAT campaign analysis found that there would be gains of £5.3 billion over 10 years. I hope that that would be subject to pretty robust scrutiny by the Treasury, but it should be taken not as the subject of argument or debate but as the starting point for a discussion between the Treasury and the sector. It seems to me that a significant body of both academic and sectoral opinion says that it would offer opportunities for our businesses to grow and for the Treasury to get more money as a consequence. I do not expect the Minister to stand up and say, “All right, on you go”—I suspect that that moment, were it ever to come, passed with the Budget—but there is still a wide range of opinion on this issue in the House and there is a wide range of support for it throughout the country. It would assist us all, Treasury included, if the Minister would be prepared to open the lines of communication and engage with those of us who are making the case.

I congratulate the right hon. Member for Orkney and Shetland (Mr Carmichael) on securing this debate and on his perseverance in ensuring that we have this opportunity to debate these important matters. He quite rightly raised the importance of tourism, of which the Government are extremely aware: 1.6 million people are employed in the sector. He made important points about the sheer reach across the economy of the tourist sector, right down to the very point that he raised in his own constituency of examples of farms where additional income is being raised through participating in tourist-related activity. The sector provides £66 billion to the UK economy and 3.8% of gross value added. He is also right that, at the moment, tourism is booming not just in his constituency, but across the United Kingdom. Last year, 2017, was a record year, with 39.2 million visitors to the UK, which was 4.3% up on 2016. Not only are more tourists coming, but they are spending more as well, with an even larger increase in the amount that they are spending.

 

It is important to put on the record the admiration that we as a Government have for the sector and the gratitude that we have for all those who work so hard in what is quite a tough industry—it is one of those sectors that has rather a nice, soft and fun feel to it, but we all appreciate that a lot of hard work goes on behind that. The Government not only recognise the importance of tourism, but are also there to support tourism. I cite three broad areas in which we do that. The first is to get the broader economic factors correct. As the House will know, we have had eight years of economic growth and the Office for Budget Responsibility is now projecting a further five years of growth. We have high levels of employment, low levels of unemployment and we are seeing inflation coming down towards its target as well. That is an important broader macroeconomic context in which we hold this debate and discuss tourism.

 

The second area is business in general. We have reduced tax on companies across the board from 28% in 2010 down to 17% in the coming couple of years.

I am very grateful to my right hon. Friend for giving way. Does he agree that one of the taxes that could really catalyse growth in our visitor economy, not just for tourism, but for business travel as well, is further reductions in air passenger duty, beyond the very welcome announcement in the Budget, because nothing, surely, can catalyse growth in our visitor economy more than further reductions in APD?

APD is certainly one of those taxes that we, along with all others, constantly keep under review. My hon. Friend will have noticed the freezing in short-haul APD that occurred at the time of this Budget, but he is right that we seek to keep that and other taxes as low as we can.

 

We supported our high streets in our recent Budget by reducing business rates by some 30% for smaller retailers, which will be of great benefit to some of the coastal towns in particular that the right hon. Gentleman will be thinking of, I know, when he speaks about the importance of tourism to the economy.

I thank the Minister for giving way. On the subject of coastal towns, as he and the whole House will be aware, the best places to visit as a tourist are some of the wonderful coastal towns of North Devon. The tourism industry in my constituency has lobbied hard for exactly the position that the right hon. Gentleman has proposed. It is something for which I have a great deal of sympathy, but I wonder whether, as well as Her Majesty’s Treasury entering into those sorts of thoughts, we could look across Government at other ways that the tourism industry can be supported. The point that is often made to me is that, for a relatively modest spend on promotion of the UK and its regions as a tourist destination, we can have greater benefits for the local economies.

I thank my hon. Friend for his intervention. I recognise the sterling work that he does in promoting tourism in his own constituency. He is a constituency neighbour of mine and I am well aware of the good work that he does. He is right: we must do a lot of important things in terms of specifically supporting tourism.

I thank the Minister for his response so far. It is always a pleasure to intervene on him. Will he acknowledge that one of the great disadvantages that we have in Northern Ireland is the border, to which the right hon. Member for Orkney and Shetland (Mr Carmichael) referred? There is an inflow of tourists going into the Republic of Ireland who take advantage of the 9% VAT rate as against what we have in Northern Ireland. It is about making sure that those tourists and visitors go across the border. Does he see the disadvantage of having the two different VAT rates, and does he also see the advantage of having a reconciled VAT rate, which would mean that we in Northern Ireland could then take bigger advantage of the US visitors who go to the Republic of Ireland?

The hon. Gentleman raises the issue of VAT specifically in Northern Ireland. As he will be aware, we undertook a call for evidence, which we announced at the Budget before last. We have now reported on that and will continue to look at the issue of VAT, although we are currently constrained by virtue of our membership of the European Union, as I will argue later. Northern Ireland actually has some advantages over the Republic of Ireland when it comes to VAT. For example, we have the highest VAT threshold for businesses that have to charge VAT in the European Union and the OECD, including the Irish Republic.

 

The right hon. Member for Orkney and Shetland mentioned the specific support we provide for tourism. We provide some £60 million per year for our GREAT Britain campaign, £20 million per year of which goes to VisitBritain. Our tourism action plan looks at regulation, transport, skills and all the other things that underpin tourist activity as well as money and taxation. Some £40 million goes to the Discover England fund for promoting tourism outside London.

 

At the heart of the right hon. Gentleman’s ask is clearly a reduction in VAT, particularly with regard to food and beverage, attractions and accommodation—  the areas that he cited when he mentioned the VAT directive and the derogations in items (7), (12) and (12a). The Government recognise the strength of feeling on this matter. We have met campaigners over many years, and I have engaged extensively with Members right across the House. We will keep VAT and VAT on tourism under review, but unfortunately there are some issues from which we cannot hide away. One of those issues is the fact that, if we are to make a change, under the current arrangements with the European Union that change would have to be UK-wide. It would therefore come with quite a hefty price tag.

 

The Treasury estimates that, in the first year at least—albeit that one recognises there are dynamic effects of reducing taxes, increasing activity and therefore perhaps getting more tax revenue further down the line—we would be looking at a cost of about £10 billion for reducing VAT from 20% down to 5% in the categories that I mentioned. That would be about £7 billion on food and beverages, £2 billion on accommodation and £1 billion on attractions. Some of that loss, or some of the relief that we would be providing, would be dead weight in the sense that it would not necessarily solely apply to supporting tourism.

There is one important factor of which we should not lose sight, which is that our tourism sector is enormously competitive. Therefore, there would be every incentive for the operators in the industry to pass on the money that would be available to them by having a reduced rate of VAT. As a consequence, we would see that recycling effect accelerated in a way that we probably would not see in any other industry.

The right hon. Gentleman makes a very important point. As somebody who philosophically believes in lower taxes, I think that is a very strong argument. However, unfortunately there is the cost argument. To use the same kind of principles to the right hon. Gentleman’s argument on recycling, clearly if we were bringing in less by way of taxation as a consequence of the reduction, there would be less to spend on other things that arguably might help tourism, including improved infrastructure and maybe even tax reliefs in other areas, such as the progress that we have made in reducing small retailers’ business rates.

 

We have one of the highest VAT thresholds of any country in both the European Union and the OECD, which is an advantage to us and our tourist sector.

We see the reduction in VAT as one of the cards in the deck that can help to grow our economy, and it is vitally important, from a tourism perspective, that we look at that. However, one of the other tools in the box is air passenger duty. We are competing against Dublin because the Republic of Ireland has zero APD. That is not just affecting Northern Ireland—it affects airports throughout the UK because, in order to save on APD, people are travelling from the UK to Dublin to go on to America. That has an impact not just on Northern Ireland but on airports in the UK.

The hon. Gentleman makes a very important point. In fact, I have been to Northern Ireland and met representatives of Belfast airport and others, and I have met them here in the UK—in London—as well. As he will know, we had a call for evidence on APD, which was launched at the Budget before last, and we have reported back on that. We have now set up a technical working group to see what kinds of opportunities there may be to devolve APD to Northern Ireland, albeit that at the moment there is the critical issue of the absence of a Northern Ireland Executive. In the longer term, we would certainly be committed to seeing the issue devolved, and then of course it would be for the Northern Ireland Executive, once reconstituted and up and running, to take the appropriate decisions around that.

 

Returning to VAT, we do of course have reduced rates in the United Kingdom in areas like museums and transport such as buses and trains, which is not universally the case across our competitor nations. It is also possible, through the retail export scheme, for certain visitors to the UK to reclaim VAT from certain retailers. That is another important VAT relief.

 

In essence, the right hon. Member for Orkney and Shetland is right that I was not going to spring up to the Dispatch Box and announce a huge tax cut across the tourism sector, much as I would love to have done. Perhaps in this crazy world in which we are living, I should have done, but there we are—I did not. I restrained myself and was responsible, for once. However, I absolutely reassure him that everything that he has said on this matter this evening, and indeed has said in the past and will say in future, has been and will be very carefully noted. We will continue to look at all taxes, and certainly VAT. I look forward to further engagement with him in the coming weeks and months, and thank him very much indeed for bringing this important debate to the House.

 

Question put and agreed to.