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The Economic Secretary to the Treasury (John Healey): I congratulate the hon. Member for East Antrim (Mr. Beggs) on securing not only the debate but the support of 67 hon. Members who signed the early-day motion that he tabled on a reduced rate for tourism. As he said, he has significant support inside and outside the House for some his arguments.
The Government recognise the vital importance of the tourism industry to the UK and, as the hon. Gentleman said, the great attraction of all parts of the UK to tourists from other countries. Last year, tourism spending in the UK was £76 billion. The wider industry employs approximately one in 13 of our work force, in the UK generally and in Northern Ireland.
In recent years, there has been new investment, new services and new confidence in tourism. Last year's figures for holiday visitors in Northern Ireland show an expected increase of 15 per cent. on 2002. The Northern Ireland tourism industry earned £395 million in 2002more than 12 per cent. up on the previous year. Of that total, £274 million came from staying visitors and £121 million from domestic holidaymakers.
The Government therefore recognise the significance of tourism in Northern Ireland and strongly support its development. The hon. Gentleman may know that Invest Northern Ireland provides support with the operating, managing and development of tourism businesses, including grants for upgrading or developing guest houses and other holiday accommodation. A new development fund has been established to promote selected new air routes, especially to and from continental Europe, through investment support for local airports in the Province to reduce landing charges for carriers.
Tourism is generally benefiting from the macro-economic reforms that we introduced since coming to office in 1997. They have helped to create a stable and steadily growing economy. Some 1.7 million new jobs have been created since the Labour Government came to power.
We have the lowest unemployment since the 1970s, and for the first time in 50 years, unemployment in Britain is lower than in the euro area, Japan and America together. This is the general picture across the UK, but it is particularly apparent in Northern Ireland, where unemployment has fallen by 27.5 per cent. since 1997, underlining the success of the Northern Ireland economy in recent years. Indeed, I heard the hon. Member for East Antrim himself say to my right hon. Friend the Chancellor in the House last month:
Lady Hermon (North Down) (UUP): Does the Minister agree that one of the main contributory factors to the increase in employment and stability in Northern Ireland is the Belfast agreement, which he has not mentioned? Since Northern Ireland is now a much more attractive destination because we have peaceby comparative standardsdoes he recognise that to make it even more attractive for tourists, the serious issue of VAT must be addressed?
John Healey: Northern Ireland is certainly a more attractive and secure destination for tourists than it was a few years ago, and I welcome that. I am about to come to the question of VAT that the hon. Lady urges me to address. I know that she and the hon. Member for East Antrim will wish me to treat his contribution to today's debate as a Budget representation, and I shall certainly do so. I shall also ensure that we look at the Deloitte and Touche modelling that he mentioned in his speech. He will know, however, that this is a relatively long-standing issue to which the Government have given careful consideration in the past.
The hon. Gentleman will also know that the scope of VAT reliefsincluding reduced ratesis governed by long-standing agreements with our European member state partners. Those agreements would not allow the application of a blanket reduced rate to all tourism-related activities, but they do allow member states, if they choose, to apply a reduced rate of VAT for certain goods and services that tourists might use, such as hotel accommodation, food, public transport and cultural activities. In the UK, our VAT zero rates are among the most generous and wide-ranging anywhere in Europe, including on items that tourists will benefit from, such as food and public transport. After 1997, we set up a special VAT refund scheme to support free admission to
The specific case for a reduced rate for hotel accommodation was considered carefully in 1998, and we decided then that a persuasive economic case did not exist for such a move. We gave the matter further careful consideration during the foot and mouth outbreak, when the tourism industry faced severe difficulties and there were many calls for such reduced rate support. However, we said then that we did not regard such a blanket measure as a well-targeted, cost-effective use of resources. Instead, we put in place a package of measures specifically targeted at those businesses affected by the outbreak, including direct help from Customs and Excise and the Inland Revenue to help those businesses to cope with their tax bills.
It may be useful if I explain why the Government still believe that a general approach is poorly targeted and that the VAT system already provides better-focused benefits for a high proportion of small and medium-sized businesses within the tourist industries. Many smaller hotels, bed and breakfasts, farm houses and guest houses, which the hon. Gentleman mentioned, already benefit from the fact that the UK has the highest VAT registration threshold anywhere in Europe. Businesses with an annual turnover of less than £56,000 do not therefore have to register for VAT and can remain outside the scope of the VAT system altogether. That means that around half of guest houses and small hotels in this country do not have to charge VAT to their customers.
As the hon. Gentleman said, the reduced rate in the Republic of Ireland is 13.5 per cent.4 per cent. below our standard rate. The reduced rate that we apply in the UK is of course 5 per cent., and we estimate that a blanket reduced rate for all hotel accommodation would cost in the region of £650 million. Moreover, the most likely beneficiaries would be major hotel chains and luxury hotels. Some argue, as he argued, that on a pilot basis a reduced rate could be targeted to apply only in Northern Ireland. Some also argue that it could be targeted only on supplies, such as accommodation, that are made to tourists. Let me be clear, however: although it is possible to introduce a reduced rate of VAT for hotel and other accommodation, legally, such reliefs cannot be confined to particular geographical areas such as Northern Ireland. Neither can such reliefs be applied selectively according to the use of the hotel or the status of the customer.
The hon. Gentleman went on to highlight his concerns about Northern Ireland and the competition created by the fact that it has a land border with another European member statethe only part of the United Kingdom, as he said, in which that circumstance exists[Interruption.] I will give way to the hon. Member for North Down (Lady Hermon), although I am keen to answer the points made by the hon. Gentleman.
Lady Hermon: With the latitude of my hon. Friend the Member for East Antrim (Mr. Beggs), I want to make a quick intervention. The Minister has just referred to the fact that the difficulty is a legal one. Is the
The Irish Republic does indeed apply a reduced rate of VAT of 13.5 per cent. for hotel accommodation, as it is entitled to do under the long-standing agreements between all EU member states. It is equally important, however, to take into account other VAT factors that work to the advantage of the Northern Ireland and UK tourism industry. We have the highest VAT threshold in Europe at £56,000. By contrast, service sector businesses in Ireland need to register when their turnover reaches Euro25,500around £17,000, which is less than a third of our registration threshold. Our standard VAT rate is 17.5 per cent. In Ireland, it is 21 per cent., so most other goods and services consumed by tourists will be subject to this higher rate.
We have a number of special schemes in place to help small and newly registered businesses reduce their VAT compliance costs, improve their cash flow and manage their entry into the VAT system. That benefits sectors such as the tourism industry in which, as the hon. Gentleman made clear, there is a high proportion of small and medium-sized enterprises. Those schemes include the flat-rate scheme, the cash accounting scheme and the annual accounting scheme. We also have a
Overall, of course, the Organisation for Economic Co-operation and Development figures show that the UK is a relatively lightly taxed economy. We have one of the lowest tax burdens in the European Union, far lower than the EU average. I hope the hon. Gentleman accepts that, when we take a broader view, we see that the United Kingdom is not disadvantaged in comparison with other EU states, as he argued on the particularly narrow issue of a reduced VAT rate.
The hon. Gentleman presented his arguments well. However, while we greatly value the contribution of the tourism industry to our economy, we continue to believe that a reduced VAT rate for hotel accommodation would be poorly targeted as well as expensive. We continue to believe that a reduced rate simply for accommodation for tourists, or for Northern Ireland, would not be permitted by VAT law. And we continue to believe that such a measure would not be as effective as the range of provisions that already exist in the VAT system and the economy generally to support UK tourism.