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Motion made, and Question put forthwith, pursuant to Standing Order No. 18(1)(a) (Consideration of draft regulatory reform orders),

Sunday Trading

Question agreed to.

24 Feb 2004 : Column 256


Hemel Hempstead General Hospital

7.29 pm

Mr. Tony McWalter (Hemel Hempstead) (Lab/Co-op): I present a petition on behalf of 22,116 residents and workers of the Dacorum district of Hertfordshire.

The petition declares:

To lie upon the Table.

Gadebridge Sub-Post Office

7.30 pm

Mr. Tony McWalter (Hemel Hempstead) (Lab/Co-op): I wish to present a petition of the Gadebridge Community Association and residents of Gadebridge.

The petition

To lie upon the Table.

24 Feb 2004 : Column 257

VAT (Tourism)

Motion made, and Question proposed, That this House do now adjourn.—[Paul Clark.]

7.31 pm

Mr. Roy Beggs (East Antrim): As a tourist destination, the United Kingdom offers a rich and diverse holiday experience to any tourist wishing to explore our national distinctiveness, our shared traditions and our unique heritage. As an industry, British tourism has enormous potential, offering the prospects of job creation, urban and rural regeneration and real economic and social benefits for all sections of our community.

Tourism represents one of the largest industries in the United Kingdom, and makes a major contribution to the British economy. It is worth approximately £75.9 billion. In 2002, 24.2 million trips were made by overseas visitors to the United Kingdom, who spent approximately £ll.7 billion, while British residents themselves made 167.3 million trips within the United Kingdom, spending more than £26.5 billion.

Our tourist industry is, however, at a distinct economic disadvantage compared with those of our European neighbours, which is a cause of serious concern. The disadvantage is that the value added tax rate applied to Britain's tourist industry is substantially higher than that applied by the majority of European Union states. In particular, the VAT rate applied to tourist accommodation in the United Kingdom is more than twice the European Union average.

With the exception of Denmark and Germany, EU states operate an average reduced rate of VAT on tourism of 8 per cent. The United Kingdom, on the other hand, continues to enforce a VAT rate of 17.5 per cent. on tourist services, including tourist accommodation. Consequently, the performance of the United Kingdom tourism industry over the past 15 years has been marked by a declining market share and a progressive deterioration in the balance of payments on tourism services. There is compelling evidence that there is a causal relationship between the two.

Only Denmark, charging 25 per cent., has a higher rate of VAT on tourism than the United Kingdom. The negative effects on the Danish economy and tourist industry are undeniable. International tourist receipts in Denmark declined during the 1990s, leading to a fall in Denmark's share of the European tourist market, from 2.4 per cent. in 1991 to 1.83 per cent. by 1994. The Danish tourist industry is currently lobbying the Government to reduce the rate of VAT to a level more in line with those of its European partners.

The Republic of Ireland provides an excellent example of the way in which extensive economic and employment benefits can be gained from the introduction of lower VAT, particularly on tourist accommodation. Following the Irish Government's decision to halve the rate of VAT applicable to visitor accommodation and restaurant meals in the mid 1980s, the number of overseas visitors to the south of Ireland increased from 1.9 million in 1986 to 3.1 million in 1990. Northern Ireland is the only part of the United Kingdom to share a land border with another European Union state, and is clearly weakened by variable levels

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within the EU of VAT on tourism. As it is isolated and more expensive to reach from Great Britain, it struggles to attract large numbers of UK residents. Moreover, Northern Ireland shares a land border with an EU state operating a reduced VAT of 13.5 per cent. The 4 per cent. difference has major cost implications for overseas tourists. In such circumstances, it is difficult to know how long the industry can be expected to remain attractive to visitors.

The majority of the tourism industry in Northern Ireland is in small and medium-sized enterprises, which are committed to remain there to develop the economy and increase employment. The tourism industry demands fair treatment on a level playing field so that those expectations can be met. In 2002, 1.7 million people visited Northern Ireland and contributed £274 million to our economy. Domestic tourists spent £121 million on top of that figure. The tax contribution to Her Majesty's Treasury, according to the Northern Ireland Tourist Industry Confederation, is more than £207 million in VAT and national insurance contributions. Tourism employs 49,000 full and part-time workers, with hotels and restaurants alone employing more than 38,000 full and part-time staff.

Tourism is estimated to contribute nearly 2 per cent. of Northern Ireland's gross domestic product, compared with 5.4 per cent. in the Republic of Ireland, 5 per cent. in Scotland and 7 per cent. in Wales. If Northern Ireland and, indeed, the rest of the UK are to improve their attractiveness to visitors and fully develop an internationally recognised and globally competitive tourism industry, the lowering of VAT on tourist accommodation is a vital first step. Reducing VAT on tourism, particularly on tourist accommodation such as hotels, farmhouse bed and breakfasts, guest houses and similar establishments would undoubtedly do wonders for the economy of the UK as a whole.

Price is a crucial factor for most tourists when choosing a holiday destination. By attracting more visitors with cheaper accommodation, tourists would be encouraged to spend more money in our restaurants, shops and visitor attractions and make use of our public transport and car hire facilities. As more business is generated, more jobs will be created. According to Deloitte and Touche's 1998 study of the effects of changing VAT rates on tourist services, a reduction of VAT on accommodation would create more than 50,000 new jobs. The UK's receipts from international tourism would increase by £2 billion in the first year following a reduction, rising to £3 billion in the third year. The direct loss of VAT receipts is more than made up for by gains in income and corporation tax and reductions in social security payments. According to Deloitte and Touche's simulation, the potential indirect gains to the Treasury from those sources rises from £426 million in the first year following a VAT cut to £753 million by year 10.

The potential for increased Treasury revenue and employment is further supported by more recent VAT calculations on UK in-bound tourism from VisitBritain. The international passenger survey notes that UK in-bound tourism receipts for 1992–93 totalled £11.7 billion. Expenditure on accommodation was only £3.94 billion, or 33.7 per cent. of total UK in-bound tourism receipts. The increase in in-bound tourism receipts as a result of reducing VAT on accommodation from 17.5

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per cent. to 8 per cent. would produce £562 million per annum and result in a very significant increase in full-time and part-time jobs.

In the light of such significant economic and employment benefits, I ask the Minister to undertake pilot research into the real economic effects that changing VAT rates would have on the British tourism and leisure industry. The Treasury should consider reducing the rate of VAT on tourist accommodation to 8 per cent. to test whether the benefits of such a reduction in VAT could be applied with economic success across the whole of the UK. As all Northern Ireland's bed and breakfasts, guest houses and hotels are already certified and registered through the Northern Ireland Tourist Board, the region is clearly the most cost-effective part of the UK in which a pilot scheme could operate, because a reduced rate of VAT could be easily controlled and quickly administered. I urge the Minister seriously to consider the opportunity that is available in Northern Ireland and impress upon him the need urgently to address this source of competitive disadvantage with the rest of the European Union.

I want briefly to outline the legislative basis for a change in the UK VAT rate. Alongside the standard rate of VAT at 17.5 per cent., the UK operates two reduced rates: one at 5 per cent., which is applied to domestic fuel, for example; and the other zero rated for goods such as children's clothes, foodstuffs and books. At first glance, that would appear to rule out the possibility of applying a further reduced rate for tourism accommodation, because under the EC sixth directive member states are entitled to apply for up to two reduced rates of VAT. However, the zero rating is not recognised by the EC directive as a reduced rate, which leaves the way open for a potential third option brought about by a change to domestic VAT legislation to include a reduced rate for tourist accommodation.

It therefore seems possible to revise the domestic VAT legislation to include the provision of hotel and similar accommodation in the United Kingdom in a lower reduced rate, effectively reducing the VAT charge due on those services to no more than 8 per cent., thereby creating a level playing field with the rest of Europe. That would in turn allow the UK broadly to follow the VAT liability that is applied to the provision of hotel and similar accommodation throughout Europe. For example, France operates a discounted VAT rate of 5.5 per cent. on accommodation, with a standard rate of 19.6 per cent.; Portugal has a discounted rate of 5 per cent. and a standard rate of 19 per cent.; Spain has a discounted rate of 7 per cent. and a standard rate of 16 per cent.; and Luxembourg has a discounted rate of 3 per cent. and a standard rate of 15 per cent.

The Minister should know that I am certainly not alone in calling for a reduced rate of VAT on tourism. He will be aware of the early-day motion that I recently tabled on the issue. In calling on the Chancellor to reduce the rate of VAT on tourist accommodation, I attracted a significant level of support from Members of Parliament across all parties. I am encouraged to note that Welsh Members of Parliament have taken steps to meet representatives of the Wales Tourism Alliance to discuss the best way in which they can take the matter forward locally. The issue clearly extends beyond the walls of Westminster.

24 Feb 2004 : Column 260

Before the Economic Secretary replies, he should know that several tourist organisations are backing and, in most cases, actively campaigning for the proposal. As well as the Wales Tourism Alliance, the England Tourism Alliance, the Scottish Tourism Forum, VisitBritain, the Northern Ireland Tourist Industry Confederation, the Northern Ireland Tourist Board, the Northern Ireland Hotel Federation, the Country Land and Business Association and the British Hospitality Association have extended their full support to my call for a reduction in VAT in the sector.

Since the Chancellor will no doubt be concentrating heavily on his next Budget in the coming weeks, I am grateful for the opportunity to discuss and debate the issue. The tourism industry throughout the United Kingdom clearly believes that the whole country will benefit from a reduction in VAT on tourist accommodation. Such a reduction will be especially helpful to the tens of thousands of bed-and-breakfast owners and small hoteliers in rural areas, and will encourage more people to holiday in our beautiful country. I hope that the Treasury will consider the proposal carefully.

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