Hospitality and tourism VAT reduction announcement

8 July, 2020

Today the Chancellor Rishi Sunak announced a number of measures to help the country on its road to recovery and the one most welcomed in our office was the temporary reduction in VAT for the Hospitality & Tourism industry for the next six months.

Calls to reduce the rate first resurfaced in 2017 after the UK made the decision to leave the EU in order to allow businesses to compete with their European counterparts who benefit from reduced VAT rate. Of the 28 countries back in 2017 in the EU the UK was one of only three that charged the full VAT on tourism (the other two being Denmark and Slovakia) – the average VAT rate for accommodation is 10.3% in the remaining 25 countries.

The ‘Cut Tourism VAT’ campaign is led by Bourne Leisure Group, Merlin Entertainments Group and the British Association of Leisure Parks, Piers and Attractions (BALPPA) and gained the support of several members of parliament across the country.

In November 2018 an adjournment debate regarding the level of VAT on tourist related service occurred where the benefits of cutting the VAT level were stated including a £5.3 billion gain to the Treasury over 10 years. If our operators were given a financial benefit, they could in theory reduce their prices and therefore attract more visitors who in turn would spend more money, all very logical really.

Back in 2017 tourists made a record breaking 39.2 million visits to the UK which despite it’s large number trailed behind Italy (58.3 million), Spain (81.8 million) and France (86.9 million) all of which grant their tourism industry reduced rates which allows them to offer their services at a cheaper rate to customers.

UK Hospitality state

“The UK is one of the few countries in Europe that does not have a reduced rate of VAT for the hospitality sector. It has been widely introduced as a measure to boost tourism and to grow the economy. We believe that its introduction would lead to thousands more jobs, economic growth, a boost for Treasury revenues and an improvement in the UK’s tourism balance of payments. The Government should urgently consider, and introduce, a reduced rate of VAT for the hospitality sector.”

With the shutdown of the hospitality industry being responsible for a quarter of the UK’s GDP fall in April post lockdown the Chancellor answered growing calls to do all he could to support it’s recovery.

“The UK’s hospitality sector employs more than three million people and is a huge generator of revenues for the Government” stated CGA group chief executive Phil Tate.

MHA Larking Gowen teamed up with industry experts to review the impact of Covid-19 on the Tourism, Leisure and Hospitality sector the details of which they published in June 2020.

Ian Russell, Owner of Wroxham Barns, states in the report:

“What I believe we need to give us a fight chance;

  • Reduce VAT for Tourism, Leisure and Hospitality to 5% for the next 12 months
  • Extend the flexible furlough scheme for Tourism, Leisure and Hospitality businesses until Sprint 2021
  • Extend CBILS payment terms to 10 years”

In the five month period to 31st of May 2020 the businesses included in the survey had already suffered a reduced income of £31m which would be why 81% of businesses surveyed agree with Ian Russell that their sector need its own furlough scheme to support it beyond the 31st of October 2020.

Whilst the Chancellor dismissed any chances at an extended furlough scheme, stating it “irresponsible” he has clearly listened to industry experts across the board when he made the decision to reduce VAT rates, even if just temporarily.

When asked what the effect on their business would be in the current year if the VAT rate was reduced to 5%:

  • 53% stated that it would help reduce their losses but not enable them to break even
  • 32% were positive that the change would help them achieve break even
  • 12% believed it would help them turn a lost into a profit
  • 3% said that the reduction would not affect them or their businesses

Chris Scargill; Tourism, Leisure & Hospitality Partner MHA Larking Gowen, said of the reduction:

“With falling turnover, an effective VAT rate reduction from 20% to 5% would potentially put £14m into the hands of the businesses in our sample.”

“If some of the £14m benefit was used to facilitate discounting on pricing the wider population would also benefit, potentially leading to higher business activity in the low season where capacity is likely to exist even with some social distancing provisions still in place.”

With some of the UK’s biggest travel websites seeing inquiries for European destinations rising by 350% and bookings up by 80% since lockdown lifted it is clear that some further support was needed for our tourism industry to help them recover and encourage customers through their doors.

I for one welcome this change, even if it’s only temporary as I know that within our own estate this will make a huge amount of difference to us as we wait for customers to regain their trust in the world.

A reduction of 15% in two VAT periods will help get us through the stalled Summer months and hopefully put us in a good position to prepare for the quieter winter months.

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