§ Motion made, and Question proposed,That this House do now adjourn. — [Paul Clark.]
7.31 pm§ Mr. Roy Beggs (East Antrim)As a tourist destination, the United Kingdom offers a rich and diverse holiday experience to any tourist wishing to explore our national distinctiveness, our shared traditions and our unique heritage. As an industry, British tourism has enormous potential, offering the prospects of job creation, urban and rural regeneration and real economic and social benefits for all sections of our community.
Tourism represents one of the largest industries in the United Kingdom, and makes a major contribution to the British economy. It is worth approximately £75.9 billion. In 2002, 24.2 million trips were made by overseas visitors to the United Kingdom, who spent approximately £11.7 billion, while British residents themselves made 167.3 million trips within the United Kingdom, spending more than £26.5 billion.
Our tourist industry is, however, at a distinct economic disadvantage compared with those of our European neighbours, which is a cause of serious concern. The disadvantage is that the value added tax rate applied to Britain's tourist industry is substantially higher than that applied by the majority of European Union states. In particular, the VAT rate applied to tourist accommodation in the United Kingdom is more than twice the European Union average.
With the exception of Denmark and Germany, EU states operate an average reduced rate of VAT on tourism of 8 per cent. The United Kingdom, on the other hand, continues to enforce a VAT rate of 17.5 per cent. on tourist services, including tourist accommodation. Consequently, the performance of the United Kingdom tourism industry over the past 15 years has been marked by a declining market share and a progressive deterioration in the balance of payments on tourism services. There is compelling evidence that there is a causal relationship between the two.
Only Denmark, charging 25 per cent., has a higher rate of VAT on tourism than the United Kingdom. The negative effects on the Danish economy and tourist industry are undeniable. International tourist receipts in Denmark declined during the 1990s, leading to a fall in Denmark's share of the European tourist market, from 2.4 per cent. in 1991 to 1.83 per cent. by 1994. The Danish tourist industry is currently lobbying the Government to reduce the rate of VAT to a level more in line with those of its European partners.
The Republic of Ireland provides an excellent example of the way in which extensive economic and employment benefits can be gained from the introduction of lower VAT, particularly on tourist accommodation. Following the Irish Government's decision to halve the rate of VAT applicable to visitor accommodation and restaurant meals in the mid 1980s, the number of overseas visitors to the south of Ireland increased from 1.9 million in 1986 to 3.1 million in 1990. Northern Ireland is the only part of the United Kingdom to share a land border with another European Union state, and is clearly weakened by variable levels 258 within the EU of VAT on tourism. As it is isolated and more expensive to reach from Great Britain, it struggles to attract large numbers of UK residents. Moreover, Northern Ireland shares a land border with an EU state operating a reduced VAT of 13.5 per cent. The 4 per cent. difference has major cost implications for overseas tourists. In such circumstances, it is difficult to know how long the industry can be expected to remain attractive to visitors.
The majority of the tourism industry in Northern Ireland is in small and medium-sized enterprises, which are committed to remain there to develop the economy and increase employment. The tourism industry demands fair treatment on a level playing field so that those expectations can be met. In 2002, 1.7 million people visited Northern Ireland and contributed £274 million to our economy. Domestic tourists spent £121 million on top of that figure. The tax contribution to Her Majesty's Treasury, according to the Northern Ireland Tourist Industry Confederation, is more than £207 million in VAT and national insurance contributions. Tourism employs 49,000 full and part-time workers, with hotels and restaurants alone employing more than 38,000 full and part-time staff.
Tourism is estimated to contribute nearly 2 per cent. of Northern Ireland's gross domestic product, compared with 5.4 per cent. in the Republic of Ireland, 5 per cent. in Scotland and 7 per cent. in Wales. If Northern Ireland and, indeed, the rest of the UK are to improve their attractiveness to visitors and fully develop an internationally recognised and globally competitive tourism industry, the lowering of VAT on tourist accommodation is a vital first step. Reducing VAT on tourism, particularly on tourist accommodation such as hotels, farmhouse bed and breakfasts, guest houses and similar establishments would undoubtedly do wonders for the economy of the UK as a whole.
Price is a crucial factor for most tourists when choosing a holiday destination. By attracting more visitors with cheaper accommodation, tourists would be encouraged to spend more money in our restaurants, shops and visitor au' actions and make use of our public transport and car hire facilities. As more business is generated, more jobs will be created. According to Deloitte and Touche's 1998 study of the effects of changing VAT rates on tourist services, a reduction of VAT on accommodation would create more than 50,000 new jobs. The UK's receipts from international tourism would increase by £2 billion in the first year following a reduction, rising to £3 billion in the third year. The direct loss of VAT receipts is more than made up for by gains in Income and corporation tax and reductions in social security payments. According to Deloitte and Touche' simulation, the potential indirect gains to the Treasury from those sources rises from £426 million in the first year following a VAT cut to £753 million by year 10.
The potential for increased Treasury revenue and employment is further supported by more recent VAT calculations on UK in bound tourism from VisitBritain. The international passenger survey notes that UK inbound tourism receipts for 1992–93 totalled £11.7 billion. Expenditure on accommodation was only £3.94 billion, or 33.7 per cent. of total UK in-bound tourism receipts. The increase in in-bound tourism receipts as a result of reducing VAT on accommodation from 17.5 259 per cent. to 8 per cent. would produce £562 million per annum and result in a very significal it increase in full-time and part-time jobs.
In the light of such significant economic and employment benefits, I ask the Minister to undertake pilot research into the real economic effects that changing VAT rates would have on the British tourism and leisure industry. The Treasury should consider reducing the rate of VAT on tourist accommodation to 8 per cent. to test whether the benefits of such a reduction in VAT could be applied with economic success across the whole of the all Northern Ireland's bed and breakfasts, guest houses and hotels are already certified and registered through the Northern Ireland Tourist Board, the region s clearly the most cost-effective part of the UK in which a pilot scheme could operate, because a reduced rate of VAT could be easily controlled and quickly administered. I urge the Minister seriously to consider the opportunity that is available in Northern Ireland and impress upon him the need urgently to address this source of competitive disadvantage with the rest of the European Union.
I want briefly to outline the legislative basis for a change in the UK VAT rate. Alongside the standard rate of VAT at 17.5 per cent., the UK operates two reduced rates: one at 5 per cent., which is applied to domestic fuel, for example; and the other zero rated for goods such as children's clothes, foodstuffs and books. At first glance, that would appear to rule out the possibility of applying a further reduced rate for tourism accommodation, because under the EC sixth directive member states are entitled to apply for up to two reduced rates of VAT. However, the zero rating is not recognised by the EC directive as a reduced rate, which leaves the way open for a potential third option brought about by a change to domestic VAT legislation to include a reduced rate for tourist accommodation.
It therefore seems possible to revise the domestic VAT legislation to include the provision of hotel and similar accommodation in the United Kingdom in a lower reduced rate, effectively reducing the VAT charge due on those services to no more than 8 per cent., thereby creating a level playing field with the rest of Europe. That would in turn allow the UK broadly to follow the VAT liability that is applied to the provision of hotel and similar accommodation throughout Europe. For example, France operates a discounted VAT rate of 5.5 per cent. on accommodation, with a standard rate of 19.6 per cent.; Portugal has a discounted rate of 5 per cent. and a standard rate of 19 INT cent.; Spain has a discounted rate of 7 per cent. and t standard rate of 16 per cent.; and Luxembourg has a discounted rate of 3 per cent. and a standard rate of 15 per cent.
The Minister should know that I am certainly not alone in calling for a reduced rate of VAT on tourism. He will be aware of the early-day motion that I recently tabled on the issue. In calling on the Chancellor to reduce the rate of VAT on tourist accommodation, I attracted a significant level of support from Members of Parliament across all parties. I ant encouraged to note that Welsh Members of Parliament have taken steps to meet representatives of the Wales Tourism Alliance to discuss the best way in which they can take the matter forward locally. The issue cleary extends beyond the walls of Westminster.
260 Before the Economic Secretary replies, he should know that several tourist organisations are backing and, in most cases, actively campaigning for the proposal. As well as the Wales Tourism Alliance, the England Tourism Alliance, the Scottish Tourism Forum, VisitBritain, the Northern Ireland Tourist Industry Confederation, the Northern Ireland Tourist Board, the Northern Ireland Hotel Federation, the Country Land and Business Association and the British Hospitality Association have extended their full support to my call for a reduction in VAT in the sector.
Since the Chancellor will no doubt be concentrating heavily on his next Budget in the coming weeks, I am grateful for the opportunity to discuss and debate the issue. The tourism industry throughout the United Kingdom clearly believes that the whole country will benefit from a reduction in VAT on tourist accommodation. Such a reduction will be especially helpful to the tens of thousands of bed-and-breakfast owners and small hoteliers in rural areas, and will encourage more people to holiday in our beautiful country. I hope that the Treasury will consider the proposal carefully.
§ The Economic Secretary to the Treasury (John Healey)I congratulate the hon. Member for East Antrim (Mr. Beggs) on securing not only the debate but the support of 67 hon. Members who signed the early-day motion that he tabled on a reduced rate for tourism. As he said, he has significant support inside and outside the House for some his arguments.
I welcome the opportunity to discuss tourism and the Government's approach to promoting and supporting the tourism industry in Northern Ireland and the United Kingdom more generally.
The Government recognise the vital importance of the tourism industry to the UK and, as the hon. Gentleman said, the great attraction of all parts of the UK to tourists from other countries. Last year, tourism spending in the UK was £76 billion. The wider industry employs approximately one in 13 of our work force, in the UK generally and in Northern Ireland.
In recent years, there has been new investment, new services and new confidence in tourism. Last year's figures for holiday visitors in Northern Ireland show an expected increase of 15 per cent. on 2002. The Northern Ireland tourism industry earned £395 million in 2002—more than 12 per cent. up on the previous year. Of that total, £274 million came from staying visitors and £121 million from domestic holidaymakers.
The Government therefore recognise the significance of tourism in Northern Ireland and strongly support its development. The hon. Gentleman may know that Invest Northern Ireland provides support with the operating, managing and development of tourism businesses, including grants for upgrading or developing guest houses and other holiday accommodation. A new development fund has been established to promote selected new air routes, especially to and from continental Europe, through investment support for local airports in the Province to reduce landing charges for carriers.
The Northern Ireland Tourist Board has developed a "Strategic Framework for Action", which provides guidance on the development of the tourist industry in 261 the next three years. The Department of Enterprise, Trade and Investment in Northern Ireland, in partnership with the Northern Ireland Tourist Board, and alongside public and private sector agencies, will oversee the framework's implementation.
Tourism is generally benefiting from the macroeconomic reforms that we introduced since coming to office in 1997. They have helped to create a stable and steadily growing economy. Some 1.7 million new jobs have been created since the Labour Government came to power.
We have the lowest unemployment since the 1970s, and for the first time in 50 years, unemployment in Britain is lower than in the euro area, Japan and America together. This is the general picture across the UK, but it is particularly apparent in Northern Ireland, where unemployment has fallen by 27.5 per cent. since 1997, underlining the success of the Northern Ireland economy in recent years. Indeed, I heard the hon. Member for East Antrim himself say to my right hon. Friend the Chancellor in the House last month:
We in Northern Ireland are enjoying the lowest levels of unemployment and the highest levels of employment in my lifetime". —[Official Report, 29 January 2004; Vol. 417, c. 381.]So we are having this debate against the background of a strong tourism sector in a strong economy.
§ Lady Hermon (North Down) (UUP)Does the Minister agree that one of the main contributory factors to the increase in employment and stability in Northern Ireland is the Belfast agreement, which he has not mentioned? Since Northern Ireland is now a much more attractive destination because we have peace—by comparative standards—does he recognise that to make it even more attractive for tourists, the serious issue of VAT must be addressed?
§ John HealeyNorthern Ireland is certainly a more attractive and secure destination for tourists than it was a few years ago, and I welcome that. I am about to come to the question of VAT that the hon. Lady urges me to address. I know that she and the hon. Member for East Antrim will wish me to treat his contribution to today's debate as a Budget representation, and I shall certainly do so. I shall also ensure that we look at the Deloitte and Touche modelling that he mentioned in his speech. He will know, however, that this is a relatively longstanding issue to which the Government have given careful consideration in the past.
The hon. Gentleman will also know that the scope of VAT reliefs—including reduced rates—is governed by long-standing agreements with our European member state partners. Those agreements would not allow the application of a blanket reduced rate to all tourism-related activities, but they do allow member states, if they choose, to apply a reduced rate of VAT for certain goods and services that tourists might use, such as hotel accommodation, food, public transport and cultural activities. In the UK, our VAT zero rates are among the most generous and wide-ranging anywhere in Europe, including on items that tourists will benefit from, such as food and public transport. After 1997, we set up a special VAT refund scheme to support free admission to 262 national museums, including the Armagh county museum and the Ulster museum in Northern Ireland. We also exempt from VAT the admission fees to many cultural attractions such as certain zoos, museums, theatres.
The specific case for a reduced rate for hotel accommodation was considered carefully in 1998, and we decided then that a persuasive economic case did not exist for such a move. We gave the matter further careful consideration during the foot and mouth outbreak, when the tourism industry faced severe difficulties and there were many calls for such reduced rate support. However, we said then that we did not regard such a blanket measure as a well-targeted, cost-effective use of resources. Instead we put in place a package of measures specifically targeted at those businesses affected by the outbreak, including direct help from Customs and Excise and the Inland Revenue to help those businesses to cope with their tax bills.
It may be useful if I explain why the Government still believe that a general approach is poorly targeted and that the VAT system already provides better-focused benefits for a high proportion of small and medium-sized businesses within the tourist industries. Many smaller hotels, bed and breakfasts, farm houses and guest houses, which the hon. Gentleman mentioned, already benefit from the fact that the UK has the highest VAT registration threshold anywhere in Europe. Businesses with an annual turnover of less than £56,000 do not therefore have to register for VAT and can remain outside the scope of the VAT system altogether. That means that around half of guest houses and small hotels in this country do not have to charge VAT to their customers.
As the hon. Gentleman said, the reduced rate in the Republic of Ireland is 13.5 per cent.—4 per cent. below our standard rate. The reduced rate that we apply in the UK is of course 5 per cent., and we estimate that a blanket reduced rate for all hotel accommodation would cost in the region of £650 million. Moreover, the most likely beneficiaries would be major hotel chains and luxury hotels. Some argue, as he argued, that on a pilot basis a reduced rate could be targeted to apply only in Northern Ireland. Some also argue that it could be targeted only on supplies, such as accommodation, that are made to tourists. Let me be clear, however: although it is possible to introduce a reduced rate of VAT for hotel and other accommodation, legally, such reliefs cannot be confined to particular geographical areas such as Northern Ireland. Neither can such reliefs be applied selectively according to the use of the hotel or the status of the customer.
The hon. Gentleman went on to highlight his concerns about Northern Ireland and the competition created by the fact that it has a land border with another European member state—the only part of the United Kingdom, as he said, in which that circumstance exists—[Interruption.] I will give way to the hon. Member for North E own (Lady Hermon), although I am keen to answer the points made by the hon. Gentleman.
§ Lady HermonWith the latitude of my hon. Friend the Member for East Antrim (Mr. Beggs), I want to make a quick intervention. The Minister has just referred to the fact that the difficulty is a legal one. Is the 263 legal basis for our not being able to have a variable rate of VAT in Northern Ireland compared with the rest of the Untied Kingdom founded on European Community law or on British law?
§ John HealeyThat is a legal constraint that exists for the UK within the framework of European VAT law.
The Irish Republic does indeed apply a reduced rate of VAT of 13.5 per cent. for hotel accommodation, as it is entitled to do under the long-standing agreements between all EU member states. It is equally important, however, to take into account other VAT factors that work to the advantage of the Northern Ireland and UK tourism industry. We have the highest VAT threshold in Europe at £56,000. By contrast, service sector businesses in Ireland need to register when their turnover reaches €25,500—around £17,000, which is less than a third of our registration threshold. Our standard VAT rate is 17.5 per cent. In Ireland, it is 21 per cent., so most other goods and services consumed by tourists will be subject to this higher rate.
We have a number of special schemes in place to help small and newly registered businesses reduce their VAT compliance costs, improve their cash flow and manage their entry into the VAT system. that benefits sectors such as the tourism industry in which, as the hon. Gentleman made clear, there is a high proportion of small and medium-sized enterprises. Those schemes include the flat-rate scheme, the cast accounting scheme and the annual accounting scheme. We also have a 264 special scheme that UK tour operators can use, which is known as the tour operators margin scheme, which was designed mainly to simplify the VAT system for such businesses by relieving them of the burden of having to register for VAT in all the member states in which they provide a travel package.
Overall, of course, the Organisation for Economic Co-operation and Development figures show that the UK is a relatively lightly taxed economy. We have one of the lowest tax burdens in the European Union, far lower than the EU average. I hope the hon. Gentleman accepts that, when we take a broader view, we see that the United Kingdom is not disadvantaged in comparison with other EU states, as he argued on the particularly narrow issue of a reduced VAT rate.
The hon. Gentleman presented his arguments well. However, while we greatly value the contribution of the tourism industry to our economy, we continue to believe that a reduced VAT rate for hotel accommodation would be poorly targeted as well as expensive. We continue to believe that a reduced rate simply for accommodation for tourists, or for Northern Ireland, would not be permitted by VAT law. And we continue to believe that such a measure would not be as effective as the range of provisions that already exist in the VAT system and the economy generally to support UK tourism.
§ Question put and agreed to.
§ Adjourned accordingly at Eight o'clock.