Tourism VAT reduction a Brexit possibility

An inquiry into the potential benefits for lowering the VAT rate for Northern Ireland’s tourism sector has been closed with no signal whether the new UK Government will respond to the Northern Ireland Affairs Committee findings.

Changes to the VAT rate for Northern Ireland’s tourism sector with the aim of making Northern Ireland equally competitive with the Republic of Ireland could be a possibility post-Brexit, MPs have found.

The Northern Ireland Affairs Committee recently published their findings of the ‘promoting the tourism industry in Northern Ireland through the tax system’ inquiry and have urged the Government to explore further the potential of implementing regional variations in tourism VAT.

The report points out a growing tourism sector in Northern Ireland over the last two decades but notes that favourable tax advantages for the Republic of Ireland has the potential to inhibit growth within the region’s tourism industry.

Recognising Northern Ireland’s unique position of sharing a land border with a country outside of the UK, the report states that “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”.

Northern Ireland’s tourism businesses are faced with the problem of losing out to custom if deemed too expensive, however, the report argues that by reducing costs, businesses run the long-term risk of lessening Northern Ireland’s tourism offer by reducing their capacity to invest and to create jobs. As a result, the MPs state that the issues facing Northern Ireland’s tourism should have a stronger influence on the UK Government’s policy formation around the effects of taxation in the sector.

Previously EU law meant that any attempts to have the rate of tourism VAT reduced for Northern Ireland would have necessitated a reduction across the UK. Although the outcomes of any new arrangements with the EU and the UK have not been formulated, it is likely that the law prohibiting the implementation of regional rates will no longer apply and therefore facilitate the reduction for Northern Ireland, while a more expensive reduction in other parts of the UK, which do not share the same competitive pressures, will not be necessary.

With figures attained from former DUP Finance Minister Mervyn Storey, the report estimates a direct annual cost of £70 million per year but explains that this figure does not reflect the indirect benefits, namely increased tourism expenditure, higher corporation tax receipts and lower unemployment. These benefits, it argues, could be sizeable in an area with more pronounced competitive pressures than the rest of the UK.

While the Treasury has raised doubts about whether tourism performance in the Republic of Ireland can be solely linked to VAT reduction, the committee notes extensive evidence from industry and experts that the lowering to 9 per cent in 2011 from the standard 20 per cent across the UK “brought substantial economic benefits to its tourism industry and the wider economy”.

Giving evidence to the committee, Hospitality Ulster, which represents bars, hotels and restaurants, estimated that a tourism VAT reduction to 9 per cent had the potential to create 8,500 jobs and increase visitor numbers by 16 per cent.

However, no consensus currently exists between industry and government on the cost benefits of any reduction. The criticism for government is that the focus is too much on the direct cost and not the indirect benefits, while those industry figures supporting the reduction are accused of making universal assumptions.

Acknowledging that much of the evidence gathered by the committee was done before the EU referendum, and so in a context for a nation-wide reduction, the committee argues that there is now a notable case to look at the issue from a Northern Ireland perspective alone.

The report states: “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.”

It adds: “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.”

The report calls for greater transparency from the Treasury in relation to its economic modelling methods and states that it is encouraged that it is now willing to take further evidence and discuss the issue in great detail. It concludes that greater collaboration is needed to conclusively determine whether a strong economic case exists for the VAT tourism reduction.

Air connectivity

As part of the inquiry and subsequent report, the committee also looked at Air Passenger Duty (APD) and its influence on Northern Ireland’s airline industry. Pointing out “compelling” evidence that the tourism industry is missing out on opportunities because of the region’s airport challenges in attracting new routes, it points out that in comparison with the Republic of Ireland, “the UKs aviation tax regime places Northern Ireland at a significant competitive disadvantage”.

It states that following on from negative feedback from the air travel industry to the Northern Ireland Executive’s exploration of abolishing Air Passenger Duty, there is now a case for examining the issue based on the dominance of Dublin Airport on the island.

The predecessor to the committee had recommended that the Treasury and Northern Ireland Executive explore ways to reduce or abolish APD on all flights into Northern Ireland from Great Britain and on all direct flights from Northern Ireland to any destination. However, this recommendation was overlooked because EU rules prohibited it. In light of the Brexit referendum outcome, the committee has urged the Government to reconsider the previous proposal.

It is the committee’s belief that abolishing APD would encourage new routes and bring substantial benefits to the regional economy.

It concludes: “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.”