Opinion: Cut out of the VAT Cut

Chris Losh

Chris Losh

25 September 2015

News that the Lib Dems this week used their conference to back a cut in VAT for the tourism industry was understandably hailed as a triumph by the British Hospitality Association (BHA).

But it will, I should imagine, be greeted with a rather thin cheer by the on-trade.

At present, the BHA’s campaign for a VAT cut covers only ‘accommodation and attractions’. In other words, great if you’re Alton Towers or Fawlty Towers – or, perhaps, an inn with rooms. But not a lot of use if you’re a bar, a pub or a restaurant.

At present, the UK is one of only four countries in the EU not to take advantage of a reduced rate for tourism services; something that the BHA claims (not unreasonably) puts its members at a competitive disadvantage compared to most of the rest of Europe.

The body has been lobbying for a VAT cut in this area for several years and has been methodical in its approach. It has commissioned two independent reports, looking at the likely maths – one using the Treasury’s own economic model – and has come up with figures that might just be palatable to the government.

Cutting VAT on attractions from 20% to 5%, would, they admit, initially cost the government £1.2bn. But with increased tax revenue, exports and tourism, this figure would drop to £700m inside a year, and be cost neutral inside two years.

‘The BHA has always been clear that any campaign has to be evidence-based, and that’s been the case from the start,’ says Vernon Hunte, campaign director.

Certainly, the combination of solid research and relatively low numbers involved has meant a growing receptiveness from those in power. The BHA is hoping to get 200 MPs (around a third of Parliament) on-side by next May. They are up to 140 now and are quietly confident of reaching their goal; momentum is, as they put it, ‘going in the right direction’.

‘The best thing,’ says Hunte, ‘is that it’s not seen as a left idea or a right idea – it’s genuinely cross-party.’

The BHA’s plan is to start with the ‘easy win’ of a tourism sector VAT cut, then, if the figures work out as they predicted, to use this to introduce a second campaign aimed at cutting VAT across the whole hospitality industry.

Clearly, this is a much bigger and more contentious issue, not least because the sums involved are far larger. Campaigning group VAT Club Jacques Borel has lobbied successfully for such cuts across Europe though, after a brief flourish, it seems to have vanished without trace in the UK. It estimates that an across-the-board VAT cut to 5% in the on-trade would mean a nett cost to the Treasury of £3bn, even after all the economic benefits are added back into the equation.

And that’s to say nothing of the political complications of, essentially, making alcohol cheaper. It would be a brave chancellor indeed who signed up to that.

So on one level the BHA’s approach of starting with the more achievable Tourism challenge, and hoping it makes the contentious Hospitality one easier as a result, makes sense.

‘We need to prove that the principle works, then we can extend it to other sectors,’ says Hunte. And an imperfect win is probably better than an impossible challenge.

Yet there’s also a counter argument that by separating the Hospitality industry into Tourism and On-Trade, the BHA has sold a large chunk of its membership down the river; that increased likelihood of success for one group is going to come at the cost of a decrease in the likelihood of success for the other.

This self-imposed splitting of the Hospitality world has one clear winner… and it’s not the on-trade.

There is, of course, the probability that an increase in tourists as a result of lower prices for hotels and attractions, will have a positive knock-on effect for nearby bars, pubs and restaurants, but it does rather look like an industry feeding off the scraps from someone else’s table.

In 2009, the Sarkozy government slashed French VAT on restaurant meals to 5.5%. Employment in the sector went up 10%, wages increased 20% and staff turnover halved. In other words, while there was a reduction in prices, and some extra margin for venues, most of the benefit of the reduced VAT was passed on to staff.

All of which means that cutting VAT in bars and restaurants might be a good way of helping businesses to fund the government’s National Living Wage, due to hit £9.00+ by 2020 – and already flagged up by most in the on-trade as a major problem.

But to have any chance of that happening I’d suggest the industry needs to be lobbying for it now.

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