Alistair Carmichael MP: The Treasury would be £4.6billion better off after 10 years if VAT is cut for the tourism industry

Posted On: 
6th November 2018

Former Secretary of State for Scotland Alistair Carmichael writes ahead of his House of Commons Adjournment debate on the potential effect of a VAT reduction on the tourism industry.

Shetland Museum and Archives at Hay's Dock, Lerwick on Shetland.
Credit: 
PA

People working in every sector of our economy will make a case for why what they do is unique and deserving of some sort of special treatment. They are often right. So what is it about tourism that would merit special treatment?

Principally it is the reach of the industry. Every community in the country has something to attract visitors. From Buckingham Palace, The Tower of London or even our own Palace of Westminster to the Edinburgh Festivals or the rich archaeological heritage of Orkney and Shetland (the only places in the country that look at Stonehenge and see vulgar modernity) our nation has attractions to bring people to these shores from across the world.

It is, of course not just the fact that this industry reaches every part of the country but also that it reaches many of the most economically fragile communities.

In 2017 tourists made a record-breaking 39.2 million visits to the UK.

As impressive a figure as that is, it remains well and truly behind Italy (58.3million), Spain (81.8Million) and France (86.9million). These other European countries manage to outstrip easily the UK, in part because they apply a reduced VAT rate on tourism related services.

The idea of cutting the rate of VAT charged on tourism may seem novel in this country (especially in Treasury where uniformity is the name of the game!) but in fact 31 European countries charge a lower rate of VAT on tourism than other sectors. They allow their business to compete more easily in, what is, a price sensitive and international market.

Soon only Denmark (25%) and the UK (20%) will be the only two of the 36 European Countries not to have a reduced rate for the tourism industry, with Slovakia due to cut their rate in January 2019.

Why do we insist on placing our tourism related businesses at a disadvantage? Why do we hold back a vital part of small, local economies?

If you want to consider the difference that this sort of change could make then you need look no further than to the other side of the Irish Sea. In the Republic of Ireland the tourism VAT rate is just 9% while In Northern Ireland it sits at 20%.

As a result tourism revenue in the Republic is 8 times that of the North. The spend per visitor in the Republic is double that in the North - £350 compared to £186 respectively.

In each and every country when Tourism VAT was cut, the tourism industry expanded.

What does this mean for jobs? To stick with the Irish example, in the Republic 20,000 jobs were created when the rate was cut.

All this points to a road map of what our tourism sector could look like, if given a bit more freedom by the our Government. Given the recent fluctuations in the currency, and the challenges coming down the track from Brexit we need some creative and innovative thinking.

Figures produced by the Cut Tourism VAT Campaign indicate that by the fourth year after reducing the rate, the Government would be £3.6million better off because of industry growth.

That positive story only improves from then, with the public finances £4.6billion better off after 10 years.

It is not difficult then to imagine a very different tourism industry emerging. Free to keep more of the money it earns, prices could fall, more investment could be made to improve the business, more people hired, better wages offered. An industry that often pays wages at the bottom end of the scale (I know - I worked in it full time for five years in my late teens and early twenties) could blossom into one which many young people would want to make their first choice.

All these things are possible. We know this because we have seen what happens in other European countries after they have cut the headline rate of tourism VAT.

I was a government minister for long enough to know that you don’t change Treasury thinking on these things overnight. So, while I may be convinced I know that Treasury ministers still have some way to go. What do I look for out of tonight’s debate? Probably nothing more than getting the government to commission their own cost benefit analysis.

The Chancellor mentioned in his Budget that the issue would remain “under close review” but without meaningful research and data, that review is unlikely to ever turn into the meaningful action that the tourism industry needs.

Rt Hon Alistair Carmichael is the MP for Orkey and Shetland. He is the Liberal Democrat Chief Whip & Spokesperson on Northern Ireland