Brexit is on the news everyday however the detail on how the UK might be able to manage its VAT rates without EU guidance has yet to be discussed in detail, which is usually where the devil is…
Pre referendum and Brexit planning there has been a long-running campaign by the tourism industry for the UK to introduce a rate on VAT below the standard rate of 20% on services supplied to tourists. Proponents have argued that this would allow hotels, restaurants, pubs and visitor attractions to cut prices, boosting sales and employment in this sector, which in turn would encourage growth in the wider economy.
European VAT law limits the discretion of any Member State, the UK included, to set lower VAT rates on individual goods and services. However there is dispensation for a lower rate on certain supplies associated with tourism and hospitality services: specifically, hotel accommodation, certain restaurant services, and some types of admission charge, including charges for entry to amusement parks.
Several EU Member States already make use of this dispensation to charge lower rates of VAT – between 5% & 15% – on these supplies, including Ireland, which introduced a 9% rate in July 2011. In the past both Labour and Coalition Governments took the position that a reduced rate would not be well-targeted nor cost-effective. More recently the current Government has said that it would consider the impact of VAT, and the impact of air passenger duty (APD), on tourism in Northern Ireland. In the Autumn Budget 2017 it published a call for evidence which considers the impact of VAT and APD on tourism in Northern Ireland which will be reported at Budget later in the year.
The UK’s departure from the EU could enable Northern Ireland and Scotland to claim control over its VAT rates and revenues. Northern Ireland could opt to use such VAT cuts to win tourism and other trade from the Republic and other home countries. This could in turn trigger internal UK tax competition following Brexit.
VAT is forecast to raise £126 billion in 2017/18. Only income tax and National Insurance contributions raise equivalent sums for the Exchequer. However, proponents argue that as soon as a VAT reduction measure is introduced, a virtuous growth cycle would be set off which would more than compensate the Treasury for the foregone VAT revenue – prices will come down, stimulating increased demand, leading to recruitment, investment and expansion in the sector.
The Hospitality and Tourism sector in the UK is a growing sector and one which has impressive amounts of employment and investment implications for the bigger economic picture. In the South West the sector is at the heart of the regions’ economy, in many areas accounting for as much as 25% of the jobs and a significant proportion of the regions’ GDP. Currently, the UK is one of the few countries in the EU to charge full VAT on hospitality services. Brexit will be bringing these arguments to the fore again, and we await that devilish detail to see if a change in tourism VAT rates could provide a much needed boost to the sector and the economy.