Promoting the tourism industry in Northern Ireland through the tax system Contents

Conclusions and recommendations

Introduction

1.With world class tourist attractions including the Giant’s Causeway and Titanic Belfast, forthcoming international sporting events such as the 2019 Open Championship, and emerging screen tourism opportunities, Northern Ireland’s tourism industry can be optimistic. The sector is now reaping the rewards of its hard work over the last 20 years, with record numbers of visitors and a challenging ambition to be a £1 billion industry by 2020. We believe that, with support from the UK Government and the Northern Ireland Executive, there is scope for even greater success. However, Northern Ireland’s tourism industry finds itself at a competitive disadvantage because competitors in the Republic of Ireland benefit from significant tax and other advantages. Unaddressed, this imbalance has the potential to inhibit growth within the region’s tourism industry. (Paragraph 9)

Northern Ireland’s unique position

2.Northern Ireland is the only part of the UK to share a land border with a foreign country, one in which the tourism industry benefits from substantial tax breaks. The lack of a level playing field for Northern Ireland’s tourism industry, especially given that tourism is promoted on an all-Ireland basis, means that its hotels and restaurants, particularly in border areas, are at a significant competitive disadvantage. They have the difficult choice of losing out on business for being too expensive, or competing on price with the Republic, but in doing so, damaging Northern Ireland’s tourism offer in the longer term by limiting its capacity to invest and create jobs. We believe the unique pressures Northern Ireland’s tourism industry faces should have a stronger bearing on policy formation by the UK Government with respect to the effects of taxation on the sector. (Paragraph 38)

Value Added Tax

3.The UK’s decision to leave the European Union changed the scope of the debate around the implementation of a lower rate of tourism VAT in Northern Ireland. Prior to the referendum, EU VAT legislation prohibited the implementation of regional rates of tourism VAT, with a legal requirement to apply any reduction across the UK. These rules will continue to apply until the UK leaves the EU. (Paragraph 49)

4.However, once the UK has left the EU, the Government is likely to have substantially more freedom to implement variable VAT rates. Subject to the forthcoming negotiations with the EU, this potentially opens the door to the implementation of a lower rate of tourism VAT in Northern Ireland, without necessitating a more expensive reduction in other parts of the country which do not share the same competitive pressures. (Paragraph 50)

5.We believe as a matter of principle that the UK Government should have the power to implement regional variations in tourism VAT. (Paragraph 51)

6.Despite HM Treasury’s view to the contrary, we have seen considerable evidence from industry experts and respected academics that the Republic of Ireland’s decision to reduce its rate of VAT on tourism in 2011 brought substantial economic benefits to its tourism industry and the wider economy. (Paragraph 63)

7.Much of our evidence was received prior to the UK’s decision to leave the European Union, in the context of needing to make a UK-wide decision as to whether to reduce VAT for the tourism and hospitality industries. However, the UK’s departure from the EU enables the Government to consider this issue from the perspective of Northern Ireland alone. (Paragraph 82)

8.Using figures provided by the former Finance Minister, Mervyn Storey in January 2016, we estimate that a reduction in tourism VAT from 20 per cent to 9 per cent in Northern Ireland—matching the rate in the Republic of Ireland—would incur a direct cost of approximately £70 million per year. However, this figure does not reflect the indirect benefits likely to arise from a reduced VAT rate, such as increased tourist expenditure, higher corporation tax receipts and lower unemployment. In Northern Ireland, where competitive pressures in the industry are far more pronounced than in the rest of the UK, the indirect benefits could be sizeable. (Paragraph 83)

9.Unfortunately, there is no consensus between industry and government on the true cost or benefit of reducing tourism VAT across the UK. Industry groups are accused of using out of date figures and making unverifiable assumptions, while the Treasury is criticised for focusing too closely on the direct tax cost, and placing insufficient emphasis on the indirect benefits. (Paragraph 84)

10.It is clear further analysis is required from the Government, Executive and tourism industry to build greater consensus around the true cost, or benefit, to the Exchequer of reducing tourism VAT. (Paragraph 85)

11.It is concerning that the Treasury’s main justifications for maintaining the status quo ignore the realities of the cross-border competition that exists on the island of Ireland. The UK’s tourism industry may be generally well-placed internationally, but it is clear that the tourism industry in the Republic of Ireland continues to enjoy a significant competitive advantage over the tourism industry in Northern Ireland arising from the tax system. The Government has recognised the problem caused to Northern Ireland by the lower rate of Corporation Tax in the Republic, but seemingly not the loss of revenue to the tourism industry. (Paragraph 92)

12.We believe the Treasury should be far more transparent with the tourism industry and the Northern Ireland Executive in terms of the assumptions and methodology which underpin its economic modelling in respect of the potential effects of a reduction in tourism VAT. We are encouraged, therefore, that the Treasury is now willing to take further evidence from industry groups and meet with representatives to talk about this issue in greater detail. (Paragraph 97)

13.The Government should look constructively at a different rate of VAT on tourism in Northern Ireland. The Treasury should work with the tourism industry and the Northern Ireland Executive to estimate the costs and benefits of a reduction in tourism VAT in Northern Ireland, to the standard required by the Office for Budget Responsibility, to determine conclusively whether or not there is a strong economic case for a VAT reduction in the Province. We would invite HM Treasury to provide regular updates to the Committee on these discussions throughout the lifetime of this Parliament. (Paragraph 98)

Air Connectivity

14.Air Passenger Duty is clearly a material factor in the comparative underperformance of Northern Ireland’s airline industry. There is compelling evidence that Northern Ireland’s tourism industry is missing out on significant levels of business and jobs because the region’s airports find it increasingly difficult to obtain crucial new routes. With two million passengers a year travelling to Northern Ireland via Dublin Airport, the UK’s aviation tax regime places Northern Ireland at a significant competitive disadvantage. (Paragraph 112)

15.It is clear that the analysis of the costs and benefits of abolishing Air Passenger Duty in Northern Ireland commissioned by the Northern Ireland Executive does not command the support of the air travel industry. The Government and the Northern Ireland Executive should re-examine the economic case for abolishing APD on flights to and from Northern Ireland, liaising fully with the air travel industry to ensure that economic assumptions are accurate, and reflect the reality of the growing dominance of Dublin Airport on the island of Ireland. (Paragraph 120)

16.In the last Parliament, our predecessor Committee recommended that HM Treasury and the Northern Ireland Executive explore ways to reduce or, preferably, abolish APD on all flights into Northern Ireland from Great Britain and on all direct flights from Northern Ireland to any destination. At the time, the Committee was told that EU rules prohibited the Government from implementing such changes. However, in light of the decision of the UK to leave the EU, we urge the Government to reconsider our predecessor Committee’s recommendation, which we believe will greatly improve connectivity for Northern Ireland. (Paragraph 121)

17.We disagree with the suggestion that reducing or abolishing APD would amount to a ‘sun subsidy’ that would be to the detriment of the Northern Ireland economy. We believe that abolishing APD on all flights would encourage airlines to bring new routes into Northern Ireland, connecting the region with key business and tourism markets, both outbound and inbound, bringing substantial benefits to the region’s economy. The Executive should seek the full devolution of APD, and follow the Scottish Government’s example by recognising the potential benefits of reducing or, preferably, abolishing APD. (Paragraph 122)

18.We welcome the Department for the Economy’s announcement of a new £4 million air route development fund, which we believe has the potential to help the region’s airports bring vital new routes into Northern Ireland and will greatly benefit the region’s tourism industry. We urge the Northern Ireland Executive to implement the fund as soon as possible. In particular, we hope that the City of Derry Airport, the smallest of Northern Ireland’s main airports, will benefit from this fund and improve its connectivity. (Paragraph 127)





17 March 2017