Hotel Accommodation: VAT

HL Deb 12 November 1998 vol 594 cc880-98

5.50 p.m.

Lord Gordon of Strathblane rose to ask Her Majesty's Government whether they believe that a reduction in VAT on hotel accommodation might boost tourist traffic and so increase Exchequer revenues.

The noble Lord said: My Lords, I must first express my gratitude to the House for permission to debate this small but very important subject. I am particularly delighted that it will afford an opportunity for the noble Lord, Lord Nunburnholme, to make his maiden speech, and that the noble Lord, Lord McIntosh of Haringey, will reply to the debate. I am sure that we can expect his customary robust defence of the Treasury coffers.

In this House the noble Lord, Lord McIntosh of Haringey, wears many hats. One that he wears with particular distinction is that of spokesman for the Department for Culture, Media and Sport. Although that department does not include "tourism" in its title, it is one of its responsibilities. I need not preach to the noble Lord, Lord McIntosh of Haringey, about the importance of tourism. It is one of our most important industries and will shortly become our most important.

Tourism is the fastest growing industry in the world. In this country it is responsible for more than £40 billion in turnover and 1.7 million jobs. More importantly, perhaps, it is responsible for one in five new jobs. My concern is that the UK is losing market share. Although I am chairman of the Scottish Tourist Board—and I declare that as an interest—and I am happy to champion the cause of the tourist industry in Scotland, my remarks here apply to the whole of the UK.

The UK share of tourism is declining. If tourism is the world's fastest-growing industry and our share is declining, that cannot be good for Britain. I am happy to look for reasons for that decline, but it must concern us. There are parts of Britain that are totally dependent on tourism for their survival, particularly some rural communities. There is a growing awareness in Whitehall of the importance of tourism, and I am delighted that this Government have appointed a Minister for tourism. That is certainly a step in the right direction.

In 1980 we had close to a 7 per cent. share of international tourist expenditure. That is now down to 4.6 per cent.—which is a drop of nearly a third—and that is serious. In that period British expenditure abroad has increased from 6.7 per cent. market share of international spending to 7.45 per cent. That is perfectly natural. I have no wish to place any inhibition on any of our fellow citizens travelling abroad. Travel broadens the mind and it is a very good thing that we travel to other countries. With increased leisure and, for the most part, somewhat cheaper air fares, that is a possibility of which many avail themselves. But it is getting to the point where people know more about Benidorm than they do about their own resorts at home. That is a bad thing.

Other countries in Europe, too, have shown a very slight decline. For example, France's share has gone down from 6.8 per cent. to 6.6 per cent. That is regrettable but not drastic, but nothing like as serious as the decline in the UK. This decline has been occurring for some time. It has been camouflaged at times of weak sterling. When sterling was weak people flocked here and the true reason for the decline did not show up. I am, regrettably, confident that when the BTA issues its annual report next year it will show a slight downturn in British tourism receipts. If it is anything like the Scottish Tourist Board, that statistic will camouflouge a very serious threat to quite a few businesses in the industry. Some have done quite well, some have done quite badly and are under threat.

The industry must shape up. It must be more competitive, offer better services and better products. The industry has taken all that on board. It will do its utmost to ensure that that happens. I am quite happy to listen to criticism of both the BTA and the Scottish Tourist Board. I am sure that we can do our job of marketing Britain abroad much better. My motto in life is that we should always be better than we were yesterday and hope that we can be even better tomorrow. The day that we think we cannot do any better we should resign, because somebody else will do the job more efficiently.

Is there anything the Government can do? I am not at this stage asking for an increase in the fairly small support that the Government give to tourism in this country and which brings them a very good return on their investment. If we have the second highest rate of VAT on accommodation in Europe, are we putting our tourism industry at a disadvantage? The only country with a higher rate than ours is Denmark, with 25 per cent. VAT. What has happened to Denmark? It is showing a decline in tourism. Without getting into correlations, coefficients and so on, it is almost commonsensical to say that if you increase the taxation on something people are less likely to use it if they have an alternative. And they do have alternatives.

Out of 15 countries in the European Union, only three do not have a lower rate of VAT on accommodation. I hope that I am not mesmerised by numbers; I am not looking for the democratic option that countries adopt a lower rate. If those 12 do not do very well we should not follow them. But what has happened to the three countries with the higher rates? Germany's tourism is in slight decline; Britain's, as I have already mentioned, is just growing and no more; and Denmark's is in decline. So the only three countries in Europe that do not have a differentially lower rate of VAT on accommodation do worse than the others.

That suggests, on a common sense basis, that it might be worth looking at the idea of introducing lower VAT on accommodation. Of our competitors across the Channel, in France for example, the VAT on accommodation is 5.5 per cent. I am aware that this country has wonderful attractions, but so have other countries. If one country charges 17.5 per cent. VAT and the other charges 5.5 per cent. VAT, there must be a certain predisposition to consider the one that charges less. In Spain VAT is only 6 per cent. and in Italy 9 per cent. In the European Union the average rate of VAT on accommodation is 8.95 per cent., just about half the rate that we charge.

We need to look at whether a change would produce any positive effect on tourism. We have some experience to go on quite near to home, in Ireland. Ireland used to charge VAT at the rate of 18 per cent.; it then reduced it in 1986 to 10 per cent. in response to the kind of pressure that the BTA is trying to bring on the Government here; and, more recently, in 1990 increased it to 12.5 per cent. I am not arguing a strict cause and effect, but it surely cannot be coincidence that in the period 1986 to 1990 the number of visitors to Ireland doubled. Its foreign earnings between 1986 and 1993 went up from £437 million to £1,012 million. It has a tourism surplus. In other words, more people spend money in Ireland than Irish citizens spend money abroad.

It is important to regard tourism as a form of importing and exporting in reverse. People who spend money in this country are the equivalent of the country making exports. Our citizens spending money abroad on their well-earned holidays are the equivalent of imports. We have a rather unhealthy negative balance of payments on tourism. I am asking the Government to look at whether reducing VAT on accommodation would have any effect on correcting that imbalance.

There is another case in point with the Isle of Man. Believe it or not, in 1994 the Treasury gave the Isle of Man permission to reduce its VAT on accommodation to 5 per cent. Therefore, there is a precedent. If the Government want another precedent, I am sure that I could persuade the industry in Scotland to accept a decrease in VAT to 5 per cent. But your Lordships would quite rightly say that that would be giving Scotland an unfair advantage. That is precisely the point. If you reduce VAT, you are giving our industry an advantage. With higher VAT than anywhere else in Europe bar Denmark, we are putting our tourism industry at a disadvantage vis à vis the Continent.

There is the possibility of reducing VAT across the board—on eating out as well. That has its attractions. But a more cautious approach would be simply to reduce VAT on accommodation first. I am not trying to reduce the Treasury's receipts. The Treasury needs receipts to undertake the Government's wholly admirable spending programme. So I am not trying to reduce the Treasury's total take. I concede immediately that if the rate of VAT is reduced receipts from VAT will fall in the short term, although perhaps not in direct proportion. It is common sense that the number of people visiting this country will increase. Therefore, the decrease in VAT receipts will not be quite the same as the proportionate decrease in VAT.

It is important that the Treasury gets money from other sources. The increase in employment—taking people off social security and unemployment benefit and having them in jobs and paying income tax—would mean more receipts for the Treasury. A proportionate increase in the profitability of people in tourism would yield more corporation tax. I do not necessarily endorse the BTA report from Deloitte & Touche that the two would balance out, but there is certainly not much in it.

What is most important is the creation of new jobs. Tourism will create more jobs for a government committed to an increase in jobs than any other industry. Therefore, there is every reason for looking closely at the case advanced by the British Tourist Authority for reducing VAT on accommodation to 12.5 per cent. or 8 per cent., which would be the European average. I commend the proposal to the Government.

6.3 p.m.

Lord Rowallan

My Lords, I thank the noble Lord, Lord Gordon of Strathblane, for bringing this interesting subject before your Lordships' House. I must declare an interest as a director of a company that is currently developing a hotel and of another that is developing a tourist activity centre.

Tourism accounts for 5 per cent. of this country's GDP and provides 7 per cent. of its employment, which amounts to 1.7 million people. It is an industry which is important as a source of employment for unskilled and first job applicants. It is the cornerstone of business creation and development and it is dominated by small businesses—more than 200,000 of them. But, as the noble Lord, Lord Gordon, said, at the same time as international tourism is growing, tourism in the UK is falling. Both the numbers of British people taking a holiday in the UK and the numbers of foreign tourists coming to our green and pleasant land are diminishing at a depressing rate. Ask any hotelier on a Scottish island, ask any taxi driver in London, where the tourists are: "Not here in the UK" is the answer. Yes, there are the backpackers, but, no, there are not the spenders; the hotel users; the purveyors of souvenirs from the cottage industries throughout our country.

Why is that the case? Is it the weather? Is it the strength of the pound? Is it the cost of staying at a British hotel? Or is it a combination of all three? There is little or nothing we can do about the weather. That is British. We can do little or nothing about the strength of the pound, as this Government have handed over the control of that to the Bank of England. But we can do something about the cost of staying in a hotel. In fact, 17.5 per cent. of the cost, or nearly a fifth of the total price, is VAT.

I feel that we should now take cognisance of the law of diminishing returns. It is indisputable that the number of tourists, both domestic and foreign, in this country is falling and has been falling since the 1980s. It follows that the number of people being employed in the industry is also falling. It also follows that the profitability of the businesses involved is reducing. All this means that the Government's tax take is becoming smaller and smaller. VAT on tourism services is higher in the UK than in 13 of the 14 member states of the EC. In fact, as we heard from the noble Lord, Lord Gordon, it is twice the European Union average.

The Republic of Ireland halved its VAT in the 1980s and, as the noble Lord said, the Isle of Man did the same in 1994. In both cases, tourism was immediately seen to rise. That proves that lower tax rates can generate higher tax yields by stimulating growth in the whole sector. It follows logically that, if the price of tourism rises, both the British and the foreign tourists go elsewhere. However, the two examples I have given are of countries which do not have the charisma for the tourist that the UK has. We have heritage. We have history aplenty. We have a Royal Family with its palaces. We have ancient castles in which tourists can stay or just visit. We have pomp and ceremony. We have our arts. We have our eccentricities, such as the Loch Ness monster. In fact, we have what the people of the world want to see, as many of their own countries are not old enough to have the treasures of age that we have.

We have three options if we want to encourage tourism. First, we can do nothing and watch the tourism industry wither away; watch hoteliers large and small go bankrupt; watch large communities die, leaving only a few specialised hotels in place to cater for an even smaller number of clients. Secondly, we can reduce VAT on all parts of the tourism industry. That would be a huge step fiscally, but also probably too enormous a tax change for the Treasury to absorb in one go. However, it would have far reaching effects on employment. Thirdly, we can do what the Question asks and reduce VAT on hotel accommodation only. That would be easier to manage for Customs and Excise. It would act as a half-way house of indeterminate length for officials to monitor and it would go a long way to reducing the pressure on the industry.

According to the British Tourist Authority's report published in March this year, it is quite clear that a reduction in VAT down to 8 per cent. for accommodation would significantly reduce the UK's tourism deficit and significantly improve growth. It goes on to say that the expected income increase from such a move would be £2 billion in year one, going up to £3 billion in year three, while the loss on VAT income would be only £0.4 billion. That loss would be immediately offset by the same amount in year one, rising to nearly £0.7 billion in year 10 in indirect gains from additional income and corporation tax receipts through increased profitability and smaller social security payments, as more people are employed. So we can see that the Treasury would actually gain financially from such a move immediately, as would the Departments of Employment and Social Security. So why are we waiting?

As employment must be one of the central planks of any government, this by-product of more employment being created as profitability increases in the industry must be an added bonus for the scheme we are debating. Another by-product is the ability for hoteliers to expand, invest in and redecorate their hotels and thereby give the modern tourist a better standard of room and service at a more affordable price and at the same time generate work for local companies and the building trade. Interestingly, 70 per cent. of all potential tourists spoken to at overseas BTA offices said that if there was a reduction of 10 per cent. in prices in the UK they would be more likely to come here. The cost to them of coming to the UK was the single biggest factor in persuading them to go elsewhere.

It was Harold Wilson, in the 1970s, who showed everyone that it was possible to go abroad more cheaply with a package tour than it was to stay in this country and he did that at a time when you were allowed to take only £50 out of the country in a year. From then on the hotel industry in the UK needed to and should have smartened up its act. It took a long time for many British tourists and the hoteliers themselves to accept this principle. But now Blackpool and the many other popular resorts of the 1970s, Butlin's and other great British holiday traditions are struggling to survive, let alone bring back their old clients.

Times have changed. The tourist of today expects a higher standard of service and better accommodation than is all too often found. The only way that resort towns, remote Scottish holiday islands, hotels in the West Country and other remote parts of the UK can survive is by providing what the new Cool Britannia tourist wants, and that must be provided at the right price. That price is lower than today's price. That price must be lower, or at least comparable, with what we have to pay when we go abroad.

It is surely nonsense that it is cheaper to go on holiday abroad, when a plane journey is necessary, than it is to go by rail or car on holiday in our own country. The only way to correct that is for the Treasury to take a gamble, for once in its life—a gamble, as the figures clearly show, which will pay off for the tourist industry and the Treasury. In fact, it is not a gamble at all because it is an absolute certainty. The Government must do something to save this important industry, and they must do it soon.

If the noble Lord the Minister who will reply gave the idea his support, it would be a tremendous signal to the whole industry to get its act in order for the 1999 season. The Government claim to be revitalising the country with new ideas and new visions. Now is the time for them to show that they are a forward-looking Government. Now is the time for them to prove that they have the guts to go where no government have gone before.

I trust that the Government will take up the mantle and the challenge of the noble Lord, Lord Gordon of Strathblane, who is after all an ardent supporter of the Government, and will accept the principles that he has set down in the debate tonight. Therefore, I look forward to hearing the Minister's reply and affirmation of the laudable ideas that he will hear from all sides of your Lordships' House, ideas for the rebirth of the tourist industry in the United Kingdom, which have the support of the British Tourist Authority. After all, that organisation is the expert in the field.

6.11 p.m.

Lord Nunburnholme

My Lords, with your permission I should also like to concentrate on tourism. The noble Lord, Lord Gordon of Strathblane, and my noble friend Lord Rowallan have more or less covered everything that I was going to say. I have been working on my speech for about three weeks. I can put forward some figures, in addition to the figures that they have put forward, which come from the British Hospitality Association and cover the years up to 1996.

I had thought that the average rate in Europe was 8.5, but apparently it is 8.9—I bow to the noble Lord's figure—and our rate is 17.5. If the figure were 8 per cent., Customs & Excise would lose £400 million per annum. However, the equation becomes more simplified. The increase in corporation tax and income tax receipts thereby will compensate and cover the full amount in the first year. That is what noble Lords say. And that is apart from the savings in social security payments to the unemployed. Within 10 years there will be further increases of revenues to the tune of something like £300 million per annum minimum. I would put it much higher.

On Ireland, I can add to the information which the noble Lord has given. In Ireland tourism accounts for 6.4 per cent. of GNP and 8.3 per cent. of employment. By 1996 visitors to Ireland had increased to 4.7 million and its own population is only 3.6 million. In 1986 Irish residents spent 150 per cent. more on holidays abroad than on holidays at home. By 1991 that was reduced to 80 per cent. The VAT receipts doubled between 1984 and 1993.

Tourism is highly price-sensitive. For 25 years I delivered high quality goods to well over 500—though I never counted—hotels and restaurants from the south of London to the west of Glasgow. In general I was aiming for the higher end of the market. Very quickly I discovered that there is a definite grading system, as one can imagine, and the first thing I looked for when looking at a restaurant was the type of cars in the car-park—Bentleys, Rolls-Royces, Mercedes-Benz, BMWs. That was my market because I dealt with the top end.

I now turn to Portugal, which has not yet been mentioned. The tourist industry in Portugal today is not recognisable from the situation 20 years ago. There are 9 million visitors to Portugal per annum. The VAT on accommodation is the lowest except for Norway and the entire population is only 9 million.

The catering trade is a useful start-up, as has been said, for the young unemployed. It can be the first foot on the ladder. Incidentally, I know a lot of chefs, restaurateurs and staff and I can tell your Lordships that the staff in this House are the finest that I have ever seen. Since 1979 in this country, as has been said, there has been a trade imbalance in tourism. As the noble Lord said, it is a business. In a survey one-third of UK residents stated that they would be much more likely to have a holiday in Britain if the rate came down. A further 36 per cent. said that they would be "slightly more likely" to do so. The Portuguese VAT rate is less than one-third of the UK rate. The entire economy of the Algarve is based on golf, hotel complexes and ex-patriots eating in the plethora of restaurants that have sprung up over the past 20 years.

I started in the tourist business some 50 years ago as a car-park attendant on the opening day of the stately home business as we know it today. Earnings to the Exchequer have been enormous. I suggest to your Lordships that we take a gamble or a punt and not even have 8 per cent. VAT, particularly on accommodation. I do not believe it would cost us a penny.

Lastly, there is a lot of inward investment—hoteliers' money—waiting in the wings. But they are also awaiting a declaration on whether we will equalise up corporation tax to EU levels. If that is done, those potential investors will look for a more profitable market away from this country. With your Lordships' permission, I repeat that tourism is a highly price-sensitive business.

6.18 p.m.

Lord Cochrane of Cults

My Lords, I must make my customary declaration of interest. As many noble Lords will know, I am still actively engaged with caravan business. It falls to me, happily, to congratulate my noble friend Lord Nunburnholme on his excellent speech, which gives a new perspective on the problems of tourism and adds greatly to the views that we have heard expressed from time to time in your Lordships' House from the usual suspects. If one looks at those who spoke in the last debate on tourism in April, one can see that a good number are here again tonight. I am glad to see the noble Lord, Lord McIntosh of Haringey, once again at the crease.

I welcome the Unstarred Question of the noble Lord, Lord Gordon of Strathblane. It is particularly important that the noble Lord has raised this point, and more so that he has raised it from the authoritative position of chairman of the Scottish Tourist Board, a body close to my heart.

I mention one slight difference that I have with the noble Lord, who has drafted his Unstarred Question a little narrowly. With hindsight, perhaps he will agree that the word "hotel" could usefully have been omitted. I shall seek to explain to your Lordships why I believe that that is so. There is no doubt that hotels are the most obvious source of accommodation when one is away from home or on holiday. However, an enormous sector, the caravan sector, which is predominantly devoted to self-catering accommodation also exists. I shall not labour the point with a mass of figures. They have been provided by those far better informed than myself. I have always felt that your Lordships may be able to stand three figures, after which they are rather turned off. However, caravans provide 40 per cent. of the accommodation in the self-catering sector. In total that amounts to some 13 million bed nights per year. There are about 18 or 20 noble Lords present today in this debate. Theoretically, if the population of the United Kingdom stays in a caravan for one night every four years, it means that on the law of averages four or so of us should have done so in the past 12 months. I admit that I am not one who has done so, but I see a great deal of the other end of the business.

Were a concession to be granted by the Treasury on the terms suggested by the noble Lord, Lord Gordon, I suggest that omitting the caravan sector would be unfair. We provide an enormous amount of accommodation. As my noble friend Lord Rowallan said, VAT takes an unconscionable slice out of what one pays. If one considers Peers' current overnight allowance of £80.50, according to my calculation £11.99 of that goes straight to the Treasury in VAT. That is quite a large amount. If it is not agreed that accommodation includes the caravan sector, we shall be playing on a "cloth untrue".

The cost of holidays is extremely price sensitive. We have great difficulty with the tour operators' margin scheme, about which the noble Lord, Lord McIntosh, has heard me speak. It is an excellent European Community scheme, but to operate successfully and fairly requires that VAT rates are broadly equalised across the participating countries. When we have a high rate, and many of our citizens visit countries with low rates, the effect is that the scheme subsidises them to go on holiday abroad in a low-rated country and penalises the citizens of higher rated countries who wish to come to this country. That is rather perverse, and, I think, could be fairly described as being a "twisted cue".

Finally, will the new VAT grouping rule moderate the effect of transfer pricing and similar financial manoeuvres by the vertically integrated major tour operators who provide so much of the outgoing tourism in this country? It would be invidious to mention names. However, there is immense complexity in the rules of the tour operators' margin scheme. From memory, in order to calculate one's liability there are some 22 steps of calculation. Perhaps I may explain the margin scheme. Tour operators pay VAT only on the profits they make on an individual holiday, plus the VAT on the foreign accommodation. That is non-recoverable but amounts to about 5 per cent. Accommodation is normally about one third of the total cost of the holiday. That is a generality. Therefore holidays sold at a big discount will attract a refund of VAT. As well as the "cloth untrue" and the "twisted cue" previously mentioned, that is the clincher: the "elliptical billiard balls".

I hope for better things. I am sure that with the noble Lord, Lord Gordon, at the helm, and with the Scottish parliament, tourism has much to look forward to.

6.25 p.m.

Lord Montague of Oxford

My Lords, first, I congratulate my noble friend Lord Gordon on bringing the subject to our attention today. Secondly, I congratulate the noble Lord, Lord Nunburnholme, on his maiden speech. He made many important points. Perhaps I may refer to one of them. He kindly paid a compliment to the staff of this House, which was justified, I am sure we all agree.

It is timely for us to put our minds round the future of tourism. It is a natural growth industry as long as we nurture it with care. Before making some suggestions as to where the Government should direct attention, including a proposal that variable VAT rates should be implemented, I believe that it is appropriate to look at the industry from the point of view of the tourists. As we have heard already, service in many establishments is still poor, slow and lacking in charm. "Have a nice day", "Have a nice time", said with sincerity gives a visitor an uplift. As regards dirt, tourists make a mess. Any gathering of people does. Disney's theme parks have demonstrated that their parks and hotels can be almost impeccable. They are famed for it. They shame too many establishments in our country. Many toilet facilities are grubby. Hotels have windows which do not open to let in cool air in the summer, or cool air in the winter where there are no room thermostats and central heating can become stifling, ruining a good night's sleep. I refer to establishments which over price, where the final bill for a family makes them decide to tell their friends that they are not going back there. And then there are the rip-offs. Particularly disgraceful are the places which put a gratuity charge on a bill—a questionable practice about which the noble Viscount, Lord Bradford, himself a London restaurant and Shropshire stately home operator has frequently talked in this House—and, in addition, leave the total open on credit cards, inviting yet a further gratuity to be added. It is quite disgraceful and we should stop that. Foreign visitors who do not understand these matters pay out either from embarrassment or ignorance. I repeat: it is a shameful practice. Those are some of the matters that the industry should correct.

What about the Government? First, it is not true that the Government have been doing little. It could be argued that more money has gone into tourist attractions than at any time. The Heritage Lottery Fund, the Millennium Commission and the Sports Council have combined to give grants in excess of £2 billion either for improving existing theatres, parks, galleries and sporting facilities, or for creating new ones such as the great new V&A Modern Art Gallery to open on the site of the Bankside Power Station in London, the Lowry Centre in Manchester, and major tourist developments in Portsmouth, Birmingham, and Cardiff. The list is endless in our towns, cities and villages. Lottery money is the friend of leisure and pleasure, which is as it should be as we punters all pursue the lottery dream. All that is at a time when the tourist industry thrives. I am a little critical of those who suggest that it is not thriving at present. However, there is one big black spot—our seaside resorts. Without question, they need urgent help, as the Labour Party's decision to absent itself from Blackpool—it is to be hoped temporarily—demonstrates.

It is against that background that we are asked to comment on the BTA proposal to reduce VAT rates on the argument that the amount lost to the Exchequer from lower rates would be made up from more visitors and thus more spending. Frankly, I just do not believe it. Of course, there would be some gain, but I doubt that in itself it would add materially to the number of visits or visitors. More importantly, it would be untargeted. London, the biggest source of tourism revenue, does not need any help. I see no point at all in considering any additional proposal which would further assist the capital, which in the summer is almost bursting at its seams.

The further away from London you go, the greater the need for direct government involvement. Scotland and Wales have this with the Scottish and Welsh tourist boards. In addition to the English seaside resorts, to which I have referred, our farmers, particularly our hill farmers in Cumbria, are having a dreadful time, and can benefit from some income from what is known as "agri-tourism". Wales and Scotland are blessed with grants for capital developments, known as Section 4, so they can help those sectors. The last government, unwisely in my view, terminated them for England. It is time to reintroduce them for small enterprises, and I do mean very small enterprises, in the English seaside resorts, and in Cumbria, for example. A large sum of money would not be involved—£5 million would be adequate to act as the catalyst which is needed. Only a minor amount of the total capital need be considered. Ordinary commercial lending, plus part from the beneficiary, should provide the balance. I strongly urge that the responsible government department considers this, and ask my noble friend the Minister to bring this to its attention.

Briefly, there are some further matters to which the Government should also attend. They should end the confusion about the plethora of signs, stars, crowns, and statements like "commended" which confuse the public about the quality standards of hotels.

A clear statement is now required with regard to the co-ordination of tourism in England. It must embrace all local authorities as their expenditure at a conservative estimate is circa 15 times that of the present national tourist board.

We should ensure that planning applications for extending present sites are made significantly easier. It is in the industry's interest not to allow further development on greenfield sites.

We should also use all the powers possible to stop European employment legislation making employment costs more expensive or less flexible

I come now to a proposal that I think is more important than the variation in VAT. We should give benefit on business rateable valuation to industries which earn significant overseas earnings; for example, hotels and tourism generally.

Finally, we should sort out the future of the English Tourist Board and the BTA. The co-operation which has been started between the British Council and the BTA is encouraging. The BTA has far too many overseas offices, which is an old-fashioned approach. There are currently over 40. This could be cut to under 20 and the finance released used to assist the areas of England to which I have referred.

We have been awaiting action on tourism for more than six months. It is good that we have a new tourism Minister, Janet Anderson, of whom we all have great expectations.

6.33 p.m.

Lord Mountevans

My Lords, to follow a former chairman of the national tourist board in pursuit of an Unstarred Question tabled by the present chairman of a national tourist board; to listen to an excellent maiden speech from my noble friend Lord Nunburnholme and to three other equally competent speeches by tourism operators makes me wonder why I, as a pensioner, should declare an interest. But as I have done in the past, I should, and I shall.

I am grateful to the noble Lord, Lord Gordon of Strathblane, for raising and articulating the argument that a cut in VAT would be good for our tourism business. I think that he put his arguments very well. However, some of his arguments were hypothetical. I had sympathy as a government Back-Bencher, and now that I am an opposition Back-Bencher I still have sympathy, with those who dismiss hypothetical arguments.

Plausible arguments have been made for cutting the tax on accommodation or, as my noble friend Lord Cochrane of Cults reminded us, on hotel accommodation. My first concern is whether that saving would be passed on to the consumer. There is evidence in this country—some of your Lordships may remember this—that a cut in duty is not always passed on to the consumer. I recall a cut in the duty on beer. I am indebted to the VAT authorities for reminding me of the cut in duty on sparkling wine. What happened? Were those cuts in duty passed on to us or to any other consumer? No; mostly they were absorbed by the suppliers and the retailers and eventually, of course, benefited the shareholders.

Alternatively, if the VAT on hotel accommodation were to be cut, would the duty be replaced by a bed tax? That is something of which we must be aware. Only a couple of months ago we debated, in the context of the Scotland Bill, whether, if we give the Scottish parliament the ability to raise funding, it might be easier to have a bed tax. That would not be perceived as a tax by the person who pays income tax because a bed tax would be paid by the tourists, the foreigners, the visitors, or whatever one likes to call them. If Her Majesty's Government were to cut VAT on accommodation, I am concerned that that would be recycled under the new regimes with which we shall have to live in the next couple of years. This question does not apply only to Scotland. A person who has put himself forward as a potential Labour candidate for the mayoralty of London sees a bed tax as a serious revenue-raising exercise.

So I come to a different point. Government spending has increased, is increasing and will, of course, increase in the future. Increased spending requires increased funding. Would it not be wonderful if we gave the tourism or accommodation industry a "leg up" by cutting VAT? I have to ask: How shall we replace the revenue? A hypothetical case has been put before us. Again, I am not totally persuaded by hypothetical cases. I wish that I shared the hypothetical faith of my noble friend Lord Gordon.

6.37 p.m.

The Viscount of Falkland

My Lords, I too thank the noble Lord, Lord Gordon of Strathblane, for this opportunity to speak on tourism. Although my noble friend who normally speaks on such matters may have supported or even replaced me tonight, I have spoken previously on tourism.

I was impressed by the charming and ingenious way in which the noble Lord made his arguments. As has been mentioned, his arguments were fairly narrow, but I do not think that the debate has been any the worse for that. In fact, his arguments, which have been echoed by other noble Lords, were the subject of a report some years ago by the British Hospitality Association which endeavoured to show that if the level of VAT in this country were lowered to a level comparable to that enjoyed in other European countries, the resulting increase in trade in the hotel industry would mean a higher tax take for the Treasury. I have heard that argument before in other areas. I am thinking particularly of the film industry. I dare say that the noble Lord, Lord McIntosh of Haringey, who is to answer the debate, will have that well in mind even if he does not refer to it directly.

The overall assumption that a reduction in VAT would be directly reflected in the prices offered to visitors must be open to sceptical questioning. A number of hotels in London, particularly the five-star variety which charge, say, £200 per night for a room, quote their prices exclusive of VAT. But the vast majority of hotels both in and outside London provide accommodation inclusive of VAT. When in the past VAT has been increased, as one would expect that increase is passed on directly to the consumer. I do not think there has ever been a decrease in the rate of VAT. Is it being sceptical to think that that decrease would not be passed on to the customer? Would hoteliers pass on the difference in rate to the bottom line of their profits? I am inclined to that view because London hotels provide for their shareholders the highest operating margins in any capital city in Europe. I am told that that information appears in the Arthur Andersen European Survey. Being sceptical still further, one might say that it is those who are making the largest profits who complain that their prices are too high as a result of tax levels. Even taking into account the charming way in which the noble Lord, Lord Gordon, presented his arguments, one could be forgiven for being slightly sceptical. I shall not continue in that vein since I am sure the noble Lord, Lord McIntosh, will take up at least some of that line of thinking.

The cost of labour in Europe is generally considerably higher than in the United Kingdom. There are many elements of cost that make up the overall pricing of hotel accommodation. Depending on one's point of view, one could make perfectly good arguments for one area or another, if attended to, resulting in a beneficial package being offered to customers.

What are the real factors governing tourism in the United Kingdom? One factor must surely be the fluctuating exchange rate, the effects of which have been felt recently when sterling has been strong. It has deterred foreign visitors coming to this country and spending money here, particularly at the lower levels. It has probably not affected business visitors to the five-star hotels in London so much. It has encouraged me, among others, to take the shortest trip to Dover in my car or on my motor-cycle in order to benefit from the improved exchange rate in France. But it is not just a matter of the exchange rate. I tend to go to France anyway since I receive better value there and find the service better. But that is another area.

Another equally important factor affecting the enjoyment of tourism in this country, touched upon by the noble Lord, Lord Montague, is the registration of accommodation. So far as I know, there is no obligation in this country for those who provide accommodation to place their names on a register. My car has been full of guide books over the years, all equally confusing. Again, it is different in France where guide books are generally of a very high standard at all levels and, even if one does not speak French, one can understand them. In this country establishments are classified according to a star system. There is a ludicrous situation in this country whereby tourist boards have introduced a crown system for accommodation. The confusion is added to when a two-star hotel is granted four crowns and a four-star hotel is granted two crowns. There is now an attempt to introduce a uniform rating system which it is to be hoped will benefit the situation. In all fairness it should be said that a different system is in preparation for Scotland. The accuracy and reliability of guide books is of the utmost importance.

We on these Benches have a policy, though I do not know whether, given the new arrangements, it will influence the Government in any way. We should require all providers of accommodation offering five bedrooms or more to be listed in a UK-wide register. We should require the four national tourist boards to implement and regulate a national grading scheme. But that is for the future, and we shall see what happens.

This is a difficult area. I do not want to be too rude about Britain, but I have travelled extensively in France this year and have found, taking equivalent towns on either side of the Channel, that the French provide a very much better service at all levels, both in restaurants and hotels. There is no escaping that. I know that one risks being lynched in this House if one says that anything is better in France than it is here, but that is the case. Roads are better; everything is better in terms of food and accommodation. There is no getting away from it. It is no good trying to pretend. We have something special, but we do not exploit it properly.

I hope that I have done justice my noble friend Lord Thurso. I am sure that he would have done better; however, I know that he agrees with almost all the points I have made—except perhaps for the use of a motor-cycle when going on holiday.

6.46 p.m.

Viscount Astor

My Lords, I, too, wish to thank the noble Lord, Lord Gordon of Strathblane, for providing this opportunity to, as it was described by my noble friend Lord Cochrane of Cults, "round up the usual suspects". I congratulate my noble friend Lord Nunburnholme on his maiden speech. He has joined "the usual suspects" and will be rounded up when we come to debate tourism in this House, as we do on a fairly regular basis.

I, too, must declare an interest. I am involved in the hotel and leisure business. The noble Lord, Lord Gordon, has put an interesting Question. It is rather a joy, since it is always interesting to be able to disagree with a Question immediately upon looking at it. That is what I am about to do. I do not believe that it is relevant to the industry as a whole. I am not even sure whether it would be legal for the Government to impose two rates of VAT, or indeed whether it is legal for the Government to lower a VAT rate having set it in line with other rates. I know that the Government can lower the VAT rate as a whole; however, I believe I am right in saying that, having set a rate, they cannot merely pick certain parts of an industry and lower that rate. Perhaps the Minister will comment on that point.

The most important factor in relation to this industry is a strong economy. The industry lacked investment in the past because the returns were not good enough. There has been a great deal of investment in the past 10 years. Of course, the industry is subject to problems. It is presently subject to the strong pound; it is always subject to fluctuations in the exchange rate. As the noble Viscount, Lord Falkland, said, there has never been an industry that has not put the argument that lower taxes would lead to double the profits. We have heard it from almost every industry in the land at one time or another—whether it is a question of taxes, duty or VAT. I am an economist, and I understand that economics are not that simple.

My noble friend Lord Rowallan said that the Treasury should "take a gamble", and that "it was a certainty". With great respect to my noble friend it can be either a gamble or a certainty, but it cannot be both. I shall not even touch on the subject of hypothecation and the Treasury. We should concentrate on what can be done, and on the role that can be played by the Government in relation to this industry. The industry is affected by the enormous amount of regulations which have been pouring out of Europe. When my party was in power, we had a deregulation initiative; we tried to cut regulations affecting the industry. In many cases we failed, and we should admit it. When I was at the Department of National Heritage there seemed to be a tide of regulations that we attempted to control. I often felt that we were being overwhelmed by them. I shall be interested to see whether the noble Lord, Lord McIntosh, believes he has been more successful.

For example, the working time directive could be enormously damaging to the hotel industry. One of our successes in this country is mobility of labour in the hotel industry working flexible hours. Without that we would not have a tourism industry. The Government must champion the cause of the industry in Brussels.

It is an expensive industry. That is why there has been a lack of investment. The costs of getting planning permission are too high, the costs of buying sites are too high as are the costs of appeals and of building. It is an expensive industry to do business in.

However, there have been notable exceptions with those who have invested, looked at their products, and brought in new concepts. They have made money. London has done exceptionally well over the past five years, but so have other places. Let us look at new concepts such as Center-Parcs, which have been very successful. It just shows what one can do in an industry with a new concept and with investment.

We must improve the product. The noble Lord, Lord Montague of Oxford, referred to the crown scheme. Could the Minister comment on progress? The Scots have decided to opt out of the new scheme and have their own separate one. That is disappointing. Perhaps the Minister would comment on where we are with the new scheme. Will it be operated with the AA and the RAC? Will there be one national scheme that we all understand?

That leads me to the role of the BTA. I believe that the organisation does a good job in representing the country abroad. But what about the English Tourist Board? Will it remain or be merged with the BTA? How will regional tourist boards be funded? I understand that there is a BTA report. Could the Minister comment on it? The BTA has been successful in raising money by matching spending with the industry and being prepared to back those who are willing to invest.

As the noble Lord, Lord Montague, said, there is an enormous amount of local government spending in the industry, it is staggering how much authorities spend. It is much more than the Government and the BTA spend; they spend the same amount as the industry. It is extraordinary how they spend it in different ways. There is a lack of co-ordination. Could the Government see how this could be improved on, take a lead and encourage local authorities to spend the money together? Too many local authorities concentrate, perfectly reasonably, on promoting their own area without any idea of what is happening in other areas, and how it relates to the industry as a whole.

I began by saying that this industry needs investment. It also needs improvement on training; it needs to raise its standards and to be promoted. There must be a good incentive for people to invest in the industry. I do not believe it needs more government money than is provided at the moment. It needs government support and encouragement. The noble Lord, Lord Gordon, said that there was a Minister for Tourism, but there was a Minister for Tourism before. I was that Minister at one point and the noble Viscount, Lord Ullswater, who is present in the Chamber, was also responsible for tourism in his day. The industry has been made a priority by every government.

I return to the theme of investment. The Government must create the conditions so that the industry can get on with the job and encourage investment. We can attract people to this country if we have a good product to sell. I look forward to hearing the Minister's speech.

6.54 p.m.

Lord McIntosh of Haringey

My Lords, I too am grateful to my noble friend Lord Gordon of Strathblane for introducing the subject and giving an opportunity for an interesting debate. It included an extremely well informed maiden speech from the noble Lord, Lord Nunburnholme. I congratulate him on it. It is always helpful to have people who know their subject inside out, in his case from a background of 50 years. I hope he will feel able to speak on this and other subjects in the future.

However, I do not recognise the description of the state of the tourist industry which my noble friend Lord Gordon gave. He complained about the drop in the UK share of world tourism. Still less do I recognise the doom scenario given by the noble Lord, Lord Rowallan, who seemed to think that the whole of the UK tourist industry was grinding to a halt. In fact, the history of tourism in this country in recent years is of almost unqualified success. Recently, the past three years, 1995–1997 have been real boom years. In 1997 there were 26 million visitors to this country, double the number in 1980. In the past five years, the number of visitors from Europe has increased by 68 per cent. and visitors from America have increased. There has been a record spend of £13 billion by visitors to this country. Britain is now the fifth most popular tourist destination in the world. In no sense is that a record of failure. I hope that the message which goes out from this debate will be of congratulation to the tourism industry rather than complaint.

It is not just me saying that; I am confirmed in it because the British Tourist Authority put out a news release in May this year, two months after the report was published which was the basis of my noble friend's Question. It said that despite all the problems there have been—and we must allow for a certain amount of flowery language from my old friend David Quarmby, the Chairman of the British Tourist Authority—Britain is a "fashionable, 'must-see' destination". The variety and diversity of tourist attractions are one of its strengths. He said, quite rightly, that the millennium will see more activity by this country than any other in the world. It will have a knock-on effect not just for tourism in the year 2000 but in the years into the next century. He said that our great strengths of countryside, culture and tradition would be of enormous value to us.

I know that there are complaints about the difficulties of tourism in this current year, although the figures for the first six months do not show them. There has been a strong pound; it has never varied against the dollar, but it is down now against European currencies to the same level as it was at the last election in May 1997. I am told that there was a loss of tourism because of the World Cup. There must have been a certain loss of tourism because we had no summer. It must have had an effect.

However, at the same time in this country we have had not just the vast increase in tourism to which I referred but specifically in hotels we have had record occupancy rates and room yields. That is because not only the Government but also many others have invested in tourism and the tourism strategy. The noble Viscount, Lord Astor, rightly referred to the huge local government spend on tourist attractions. My noble friend Lord Montague mentioned the billions of pounds of lottery-assisted investment in this country. The Department of Culture, Media and Sport which is responsible for tourism set up, immediately after the election, working groups not of officials but people from the tourist industry itself who covered the whole range of subjects: tourism, promoting the quality of tourism, development, opportunities for young people, training, marketing, employment prospects to which my noble friend Lord Gordon rightly referred, and many others. The working groups have produced recommendations from which, in the next few months, my honourable friend Janet Anderson, Parliamentary Under-Secretary with responsibility for tourism, will publish a comprehensive strategy paper.

The noble Viscount, Lord Astor, is right when he says that a strong and stable economy is required, and that is the Government's firm intention in creating conditions for tourism growth.

It is perfectly true that 12 countries in the European Union impose a reduced rate of value added tax on hotel accommodation, which is perfectly legal under EU legislation. The reduced rate varies from 3 per cent. in Luxembourg to 12.5 per cent. in Ireland, which has been used as an example of how important is VAT. The noble Lord, Lord Mountevans, rightly pointed out that some countries that have the lowest VAT tend to offset it by having a bed tax.

It is not just the higher VAT itself that is important. This country has the widest range of zero-rated items in Europe. Food and drink account for 23 per cent. of tourist expenditure in this country. Passenger transport is also zero rated, and internal transport accounts for 16 per cent. of tourist spend in this country. Children's clothing is also zero rated, although that may be less important.

We also have the highest VAT threshold for small businesses: of £50,000. That affects cottage lets, bed-and-breakfasts, guest houses and others falling within the category of accommodation. We have unprecedented low rates of business tax—the lowest rate of corporation tax ever and lower business taxes than most of the European countries cited as examples. The pattern of taxation in this country and in other European countries is by no means as one-sided as appeared from some speeches this evening.

The report produced by Deloitte & Touche in April for the tax working group of the British Tourist Authority stated that a reduction in VAT on hotel accommodation to 8 per cent. would cost the Exchequer £400 million but would be offset by increased spending on tourism and would therefore improve the yield from corporation tax and achieve reductions in social security payments. That is legitimate lobbying and I do not complain about it, but it is no more than lobbying and does not stand examination. The noble Lord, Lord Cochrane of Cults, used the fanciful statistic of each person in this country staying in a caravan one night in four years. That is about the level of some of the statistics in the report.

The noble Lord, Lord Rowallan, seems to believe that if one cuts the rate of VAT on hotel accommodation by 10 per cent., one is somehow cutting prices by the same percentage. Nothing could be further from the truth. Only 34 per cent. of tourism spend in this country is on hotel accommodation. If VAT were cut to 8 per cent., that would be a reduction of 3 per cent. in total tourism spend. If it were reduced to the average of 12.5 per cent., to which my noble friend Lord Gordon of Strathblane referred, that would produce a cut of less than 2 per cent. in total spend. That is the absolute maximum because 12 per cent. of expenditure on hotels is by UK business visitors who can recoup the tax anyway.

Some £427 million is spent by overseas conference visitors to this country, many of whom can recover VAT. Also, 18 per cent. of hotel expenditure involves establishments that are below the VAT threshold. The effect on prices of cuts in VAT of the kind proposed would be only 1 per cent. or 2 per cent., to be generous. Noble Lords are right to say that tourism expenditure is price sensitive but the claim that matters can be improved by the sort of cut in VAT proposed is not proven. In fact, it is highly improbable.

I want to conclude on a friendlier note but before I do so, I will refer to some particular points raised. The noble Viscount, Lord Falkland, and the noble Lord, Lord Mountevans, questioned whether any cut in VAT would be passed on. When we introduced the cut on long-term hotel stays of more than one month, the evidence was that saving did not appear to be passed on. The noble Lord, Lord Cochrane, asked about the tour operators' margin scheme, which is a simplification that creates savings. It is true that there is some distortion where there are different standard rates but the scheme is based on charging the standard rate on hotel accommodation, not any reduced rate. As people usually use tour operators in their own countries, I doubt that the effect of the tour operators' margin scheme is significant.

The noble Viscounts, Lord Falkland and Lord Astor, and my noble friend Lord Montague, referred to the crown grading scheme. Good progress is being made with that in England and Wales, with agreement between the RAC, the AA and the English Tourist Board. It will take a long time to put that scheme in place. It will be advertised, and only then can it be brought into force. The noble Viscount, Lord Astor, referred also to the danger of over-regulation, but he is not right about the working-time regulations, which are very simple and afford a minimum of justice. I do not accept any criticism of them.

I am sceptical about the claims made for the potential effects of a cut in VAT on hotel accommodation in what is already a highly successful tourist industry. However, Customs & Excise are studying the BTA report carefully, as are Treasury Ministers, and they will give it every possible and sympathetic consideration. But VAT is a significant part of our revenue and hotel accommodation is a significant part of VAT receipts. It is our duty to balance that with any claimed savings that might result from a change in VAT on hotel accommodation.

House adjourned at ten minutes past seven o'clock.