House of Commons - Tourism - Culture, Media and Sport

Tourism - Culture, Media and Sport Contents

5 Taxes

Air Passenger Duty

74. Tourism interests have long campaigned for reductions in VAT and Air Passenger Duty, though only the campaign to cut the latter has so far engaged with success. Air Passenger Duty (APD) is a duty of Excise which is levied on the carriage, from a UK airport, of chargeable passengers on chargeable aircraft. It becomes due when a flight with chargeable passengers occurs and is payable by the operator of the aircraft. The amount due is dependent on the final destination and class of travel of the chargeable passenger. The Government's general view on APD has been that "APD is a relatively efficient and non-regressive tax, and that abolishing it would have a small impact on GDP and cause a net loss of overall tax receipts."[109]

75. Currently, the tax is based on four geographical bands set at intervals of 2,000 miles, so that travellers flying farther pay a higher rate. In his 2014 Budget, the Chancellor announced a new two band structure from April 2015—merging the three longer range bands so that flights of over 2,000 miles would pay the same, lower, band B tax rate that applies to flights to the USA. The Fair Tax on Flying Campaign described this removal of the two highest APD bands as "a welcome first step in the reform of APD. However, even after these changes have come into effect the UK will still levy the highest passenger departure tax anywhere in the world."[110]

76. The Airport Operators Association told us: "One modest measure which the Government could take in its 2015 Budget would be to abolish APD on children, which would cost the UK Treasury a relatively small amount of money and encourage more visits to and from the UK by families."[111] Subsequently, during the course of our inquiry, the Government announced further reductions in APD, specifically in relation to children. Following the Chancellor's Autumn Statement, Air Passenger Duty for children will be removed from April 2015 for under 12s (and from April 2016 for under 16s). People who have already booked their holidays for after this date will be able to get refunds from their travel agent. The Fair Tax on Flying Campaign can claim much credit for this, even if their task is made the easier by the scope for gradual, relatively affordable, reforms. Ultimately, they would like to see APD go completely.[112]

77. Mark Tanzer of ABTA told us he sees APD as a "very significant drag" on both the inbound and outbound travel trade. He told us: "We would like whichever Government is in power to do a public review with a view to reducing and then ultimately eliminating Air Passenger Duty."[113] Supporters of the abolition of APD invariably cite a 2013 report by PricewaterhouseCoopers, The Economic Impact of Air Passenger Duty, which the British Air Transport Association told us found that:

· Abolishing APD could boost UK GDP by 0.46 per cent in the first year, with continuing benefits to 2020.

· The GDP boost to the UK economy would amount to at least £16 billion in the first three years and result in almost 60,000 extra jobs in the UK over the longer term.

· Abolishing APD would pay for itself by increasing revenues from other sources such as income tax and VAT. This net benefit, even after allowing for the loss of APD revenue, would be almost £500 million in the first year.[114]

78. Speaking in an Opposition day debate in October 2013, the then Exchequer Secretary, David Gauke, said of APD:

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79. While taxation is ultimately a matter for HM Treasury, that does not absolve government departments from their roles in policy development in areas affecting their responsibilities. In relation to APD at least, the Department for Culture, Media and Sport acknowledges this in its Annual Report for 2013-14 where it lists "Our Achievements in 2013-14". Among these is the 2014 Budget announcement, referred to above, that Air Passenger Duty higher band ratings are to be abolished, "thereby boosting the UK tourism sector". The Annual Report is silent on the issue of VAT on tourism services. We recommend that the Government analyses the impact of APD on the United Kingdom's tourism industry and takes the findings into account when reviewing this in the future. Developments in Scotland and Wales should be monitored for their impact on England.

VAT

80. The Campaign to Cut Tourism VAT has garnered much support throughout the industry. It is concerned that UK tourism is at a "major competitive disadvantage compared to other EU countries, because VAT is applied at the standard rate of 20%, whereas nearly all other EU member states have some reduced rate."[116] The Campaign "is strongly of the view that reducing VAT on visitor accommodation and attractions will increase the UK's competitiveness with the rest of Europe, create much needed jobs and grow GDP throughout the economy at a time of great need, and at a very low risk to Exchequer income."[117]

81. Among the advantages of cutting VAT on accommodation and admissions from 20% to 5% are, according to the Cut Tourism VAT Campaign, greater tax revenue: "The latest research shows that although there is a net fiscal loss in Year 1 of £784 million (direct VAT loss of £1.527 billion offset partially by other fiscal income of £743 million), from Year 3 there will be a fiscal surplus from reducing the rate of VAT on tourist accommodation and attractions. Over 10 years £3.9 billion at 2014 values will be raised by the Exchequer."[118]

82. The Campaign's evidence refers to modelling work that supports their aims: "In 2012, the impact of a reduction in tourism VAT was independently modelled by Professor Adam Blake of Bournemouth University using the Computable General Equilibrium (CGE) model owned by HMRC and used by HMT. The report compared the impact of reducing VAT on tourism with other measures aimed at boosting the economy including a 2p reduction in the standard rate of corporation tax, a 20% reduction in rates for employers' national insurance contributions and a 1p reduction in the standard VAT rate. Professor Blake concluded that a tourism VAT reduction was 'one of the most efficient, if not the most efficient, means of generating GDP gains at low cost to the exchequer that I have seen with the CGE model.'"[119]

83. Professor Blake himself told us that he also looked at the effect of cutting VAT on accommodation and admissions separately though this was not covered in what was essentially a report by and for the Cut Tourism VAT Campaign.[120] We cannot form a judgment on what Professor Blake termed "just one model"[121] but it is clear that his work is highly important and merits proper scrutiny and challenge. We recommend that the Government thoroughly assesses the merits of the claims of the Cut Tourism VAT Campaign by performing its own modelling work and publishes the results of this. The costs and benefits of reducing VAT on all tourism services, together and in isolation, should be assessed so the Treasury decision-making is fully and transparently informed.

84. Interestingly, the evidence from the Campaign to Cut Tourism VAT does not mention the EC VAT Directive's item 12a: "restaurant and catering services, it being possible to exclude the supply of (alcoholic and/or non-alcoholic) beverages." Graham Wason of the Campaign gave the following explanation: "One reason is that the cost of applying it to restaurants and catering services in terms of the direct loss of value added tax is very significantly greater and we do not believe that is a feasible or realistic ask in the present economic climate. A second reason is that it is on accommodation and attractions that we are more internationally competitive. There are not as many people who travel internationally to go for a cheaper meal, but they do travel internationally for cheaper accommodation and cheaper attractions. The third reason is that the disparity with the rest of Europe is far greater on accommodation and attractions than it is with VAT on restaurants."[122] Both Deirdre Wells of UKinbound and Brigid Simmonds of the British Beer and Pub Association referred to the advantages of cutting VAT on food in relation to job creation. Both acknowledged the fiscal environment that makes cuts in this area challenging.[123] Brigid Simmonds said: "The cost of cutting food would be greater to the Treasury but the job creation would probably be greater as a result, because you would need more people in a pub to work there if you have more customers. But on the costs in accommodation and attractions, we would not be against the accommodation because we have 40,000 rooms in pubs, but it does not perhaps create as many jobs."[124]

85. The Campaign to Cut Tourism VAT criticises the Government for choosing to "ignore" the Campaign and the benefits a VAT reduction would bring about: "DCMS has failed to give this campaign the consideration it deserves, and in doing so, has damaged its reputation with industry representatives and large tourism businesses."[125] Graham Wason of the Campaign told us that three or four requests to meet the current Tourism Minister had been turned down on the grounds that VAT was a Treasury matter.[126]

86. When we put such criticisms to the Sport and Tourism Minister, she told us: "As a direct result of my own interest in this area, and requests for us to look at it, I have agreed to have a round-table meeting with the tourism VAT group and others, and that meeting will take place on 9 March. I also know that the group has engaged fairly extensively with the Treasury. Historically, there has been a sharing of modelling and there is dialogue, but it has just not gone in the direction the Campaign wants. There is no intention whatever of not listening: I will always listen. They will have their opportunity on 9 March to raise any issues directly with me."[127] The Minister was not optimistic about the outcome though: "my concern at the moment is that it just does not seem to be affordable: whichever way you look at it, there is still a revenue shortfall of £1.2 billion if you include accommodation and attractions, and something in the region of £7 billion if you include hospitality. That, if we followed it through, would require additional borrowing which is not part of the coalition deficit reduction strategy, so at the moment I do not think it is going to happen."[128] We commend the Minister's decision to engage with the tourism industry on the subject of VAT. This should be the start of a thorough analysis of the scope for cutting VAT on a variety of tourism services, in tandem or separately. If the case for reduced VAT on at least some tourism services is as strong as the evidence we received suggests, then the Sport and Tourism Minister should bring all the influence she can to bear on HM Treasury's policy development.

87. We further recommend that the Government conducts a broad, public review and consultation on tourism taxes, including VAT and APD. Where the evidence leads, and practicalities allow, these taxes should be lowered to benefit both tourism and the wider economy.

Business rates

88. While the British Beer and Pub Association is supportive of VAT reductions on accommodation (and food), it considers the system of business rates and the reliefs on offer to be of more immediate concern. The BBPA told us:

Such a property tax specifically penalises service-sector businesses such as pubs, that are one of the key tourism offers. Business rates can make up almost 10% of a pub's operational costs.

The extension of the Small Business Rate Relief scheme which reduces business rates for premises with a rateable value of under £12,000 has been hugely helpful for pubs, as has the £1,000 reduction for two years for all retail premises with a rateable value under £50,000. The BBPA is calling for a cap in business rate rises and believes Small Business Rate Relief should be redefined to cover all premises under £18,000. The relief itself only runs until April 2015 and it is vital that this is extended at least until the end of the current valuation period (2017). There is also a need to reform Rural Rate Relief. Most pubs eligible for Rural Rate Relief already receive Small Business Rate Relief and one cannot be added to another. In addition the definition of Rural Rate Relief which only covers the last pub left in the village is often disputed by local authorities who, for example, claim that the village is only a hamlet. Often pubs in rural locations provide essential local services from shops to post offices to wi-fi hubs. They are a focus for rural tourism and need more support.[129]

89. According to the Local Government Association: "Letting councils retain 100 per cent of business rates growth without a corresponding cut in revenue support grant will further incentivise councils to grow local economies. Councils and local partners would have greater flexibility to prioritise investment decisions to strengthen local growth sectors, including the visitor economy."[130] Bernard Donoghue of the Association of Leading Visitor Attractions told us that local authorities, particularly in coastal and seaside areas, need to be allowed to keep a greater proportion of business rates tax, "so that they can reinvest it back into the public realm and their tourism marketing."[131] In the Autumn Statement 2014, the Chancellor announced a full review of the structure of business rates. We urge whichever Government is in office after the General Election to take full account of the needs of the tourism industry when reviewing business rates.