REPORT FROM THE U.K.—Amid a worsening double-dip recession, hoteliers in the United Kingdom fear that, after the expected busy Summer Olympics, high value-added tax rates coupled with the eurozone crisis will deter visitors.
The British Hospitality Association and industry leaders continue to lobby to reduce the U.K. tourism sector’s 20% VAT to 5%, a plea ignored by Chancellor of the Exchequer George Osborne in his annual budget released in March.
Deloitte research shows the cut could generate 79,000 jobs and contribute an additional £2.6 billion ($4 billion) to the Exchequer over the next decade.
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Ufi Ibrahim, chief executive of the BHA |
Ufi Ibrahim, chief executive of the BHA, told HotelNewsNow.com the U.K. is looking distinctly uncompetitive. “All but three other (European Union) member states—Denmark, Lithuania and Slovenia—have a reduced rate of VAT for hotel accommodation, and many have a reduced rate for restaurant meals and visitor attraction,” she said.
“For example, with hotel accommodation France has 7%, Spain has 8%, Germany and Italy have 10%. This not only makes U.K. prices that much higher and less competitive, thus discouraging incoming travel, but (it) makes hotel prices in Europe less expensive for British people, thus encouraging outbound travel.”
In the light of the double-dip recession in the U.K., “it makes it all the tougher, as consumer spend is increasingly limited,” she added.
Rhys Roberts, chairman of Best Western GB—who with more than 280 British hotels are fully behind the lobby—echoed Ibrahim’s concerns that the 20% rate is having a seriously negative impact.
“Firstly, it’s reducing the capital spend operators might wish to invest in properties—so the extra tax effectively is siphoning off extra investment. And secondly, it’s costing jobs,” he said. “A reduction would encourage capital investment and help create more jobs. It’s a win-win here for the government if they believe enough to make this decision.”
A competitive global market
VAT was introduced in 1973 as a means to generate revenue for general government expenditure. An average 15% rate rose to 17.5% in 1991. During the 2008/2009 recession, it was returned to 15% in a move considered to have had little impact on consumer spending. It then jumped to the current 20% in January 2011.
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Rhys Roberts, chairman of Best Western GB |
However, in the self-governing Isle of Man in the Irish Sea, where government is only overseen by the Crown, the rate of VAT on hotels has been 5% since 1994, enabling it to compete more effectively with the Channel Islands and mainland Europe.
Jersey, a British Crown Dependency off the coast of Normandy, France, sees a 5% Goods and Services tax on hotel accommodation.
The question for hoteliers: Why won’t mainland U.K. follow suit?
“The global tourism industry is fiercely competitive, and the U.K. needs to do everything it can to stay ahead in a period of real celebration for Britain,” said Simon Vincent, area president Europe for Hilton Worldwide. “Given the tourism sector is one of the U.K.’s largest employers and economic drivers, we encourage government to help the industry compete with a reduction in VAT, boosting further revenue and career opportunities as highlighted by the Deloitte research.”
Thomas Dubaere, Accor’s managing director for U.K. and Ireland, shared a similar sentiment.
“A reduction in VAT will help our industry prosper and continue to grow. The hospitality sector is one of the biggest employers in the U.K., and a VAT cut would support its development in terms of network growth, job creation and investment in people. In turn, this boosts the economy and creates a skilled workforce, which are steps in the right direction in the current climate.”
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Thomas Dubaere, Accor’s managing director for U.K. and Ireland |
As the U.K.’s third largest export industry, tourism brings in £17.7 billion ($27.2 billion) in foreign exchange earnings annually, supporting more than 2.5 million jobs and contributing more than £34 billion ($52 billion) a year to the Exchequer. Although some headway has been made—including increased one-off funding for VisitBritain and VisitEngland (although the latter’s annual grant was cut)—overall tourism funding has been reduced.
The BHA acknowledged via a note on its website that a reduction in the VAT rate would cost the government up to £1.2 billion ($1.8 billion) in lost revenue per annum. “However, as soon as the VAT reduction measure is introduced, it will set off a virtuous growth cycle—prices will come down, stimulating increased demand, leading to recruitment, investment and expansion in the sector.”
By the BHA’s fiscal model, the Treasury would begin to recoup investment within three years. Within a decade, this would become a net gain of £2.6 billion ($4 billion).
Pocketing the savings
Whether savings would be passed on to guests is unclear.
Data from STR Global, sister company of HotelNewsNow.com, show an average-daily-rate increase of 3.9% in London and 0.1% in regional U.K. April year to date. Revenue per available room was up 4.9% for London, although the metric fell 1.3% in the regions.
The BHA’s Ibrahim said not passing on reductions “would not necessarily be negative. Increased profits mean more money for investment in the sector, and raising quality will in turn lead to growth in the sector through increased competitiveness. It would also mean more funds available for recruitment, training and higher wages, which would generate increased income tax for government. And increased profits generate higher corporation tax receipts and tax on dividends.”
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Simon Vincent, area president Europe for Hilton Worldwide |
With London hotels operating at 80%-plus occupancy, there’s also some debate as to whether a cut is needed.
However, as Ibrahim highlights, “It’s not just London hotels that will benefit. Provincial hotels, which operate at 10% lower occupancy, will also gain. The major factor keeping London hotel occupancy high is the rate of exchange, which has greatly encouraged overseas visitors to the U.K. This benefit has overridden the negative impact of the rise in VAT to 20%, but it reinforces how competitive international tourism is.”
“There is tough competition, and we need to be operating on a level playing field,” Roberts of Best Western said.
“There’s been numerous reports commissioned on this, and every single report that I have seen or am aware of has come to the same conclusions: In the long term this will boost governments coffers rather than reduce it, it would boost employment, and it would encourage visitors to the U.K.,” he continued. “I can’t see any downside to that at all.”