Cut Tourism VAT HMT Discussion Report 04dec12

The Impact of Reduced VAT Rates on British Visitor Accommodation, Attractions and the Wider Economy: Report of Discussions
with HM Treasury and Results of Dynamic Partial Equilibrium and Computable General Equilibrium Models
December 2012
4th December 2012 The Impact of Reduced VAT Rates on British Visitor Accommodation, Attractions and the Wider Economy: Report of Discussions with HM Treasury and Results of Dynamic Partial Equilibrium and Computable General Equilibrium Models The Campaign for Reduced Tourism VAT is pleased to present this report on submissions to and discussions with officials at HM Treasury (HMT) on the impact of reduced VAT rates on tourism services in the UK. Representatives of the Campaign first met HMT officials in September 2011 to discuss a comprehensive report on the impact of reduced VAT rates on UK visitor accommodation and attractions. At this meeting it was suggested that this impact be modelled using a Computable General Equilibrium (CGE) model and that the Campaign work with Professor Adam Blake of Bournemouth University who built and helps maintain a CGE model owned by HMRC and used by HMT. Permission was granted for Professor Blake to use the core of this model on behalf of the Campaign. A further meeting was held to discuss the findings of the CGE analysis in September 2012. The Campaign is most grateful to HMT officials for permission to use the Governments model and for their readiness to engage actively in these discussions. This report contains a review of the background to the Campaign, results of the models, additional submissions to HMT and our conclusions from this analysis. Professor Blakes conclusion from his analysis is that reduced VAT on tourism services represents one of the most efficient, if not the most efficient, means of generating GDP gains at low cost to the exchequer that I have seen with the CGE model. This analysis has reinforced the Campaign s firm view that reducing VAT on visitor accommodation and attractions represents the Governments best option to create jobs and stimulate growth throughout the economy at a time of great need, and at very low risk to Exchequer income. We ask the Government to reduce VAT on visitor accommodation and attractions at the earliest opportunity. Graham Wason Campaign Chairman
CONTENTS
Page SUMMARY 1. Introduction and Background 2. The Importance of UK Tourism 3. The Dynamic Partial Equilibrium (DPE) Analysis 4. The Computable General Equilibrium (CGE) Analysis 5. Comparison of Results of the DPE and CGE Models 6. Principles for a better taxation system: Proposed changes to the UK VAT system and its impact 7. Discussions with HMT Officials in September 2012 8. The Route to Growth 9. Conclusions Appendix A: Appendix B: Appendix C: Appendix D: Rates of VAT in the Tourism Sector in EU Countries Professor Blakes CGE Analysis The Nevin/Wason DPE Model Campaign Supporters 4 12 18 24 31 36
44 57 65 67 70 71 80 87
The Impact of Reduced Tourism VAT Rates: Discussions with HMT and DPE and CGE Model Results
SUMMARY
Background to this study
1. For over 20 years the UK tourism industry has been concerned at the competitive disadvantage which it faces as VAT is applied to tourism in the UK at the standard rate, whereas most EU member countries apply VAT to tourism at a reduced rate, as is specifically permitted. The rate of VAT on visitor accommodation (e.g. hotels) and admissions to cultural services in France and Germany is 7%, in Spain 8% and Italy 10%, compared to 20% in the UK. 2. Over this same 20 year timespan numerous detailed independent analyses have found that reducing VAT on UK tourism to the UKs only prevailing reduced rate of 5% 1 would stimulate both domestic and overseas demand leading to expansion of the sector, the creation of jobs and a fiscal return to HM Treasury that would reverse the long-term trend of Britain's worsening tourism balance of payments. The latest report, carried out by Deloitte with Graham Wason and Michael Nevin 2, included detailed fiscal analysis based on a Dynamic Partial Equilibrium (DPE) model. The results of this model indicate that reducing VAT on visitor accommodation and attractions will create 78,000 jobs and provide a Net Present Value (NPV) fiscal return to the Exchequer over 10 years of 2.6 billion (2011 prices). 3. In early 2011, the current Campaign for Reduced Tourism VAT (the Campaign) was set up by Bourne Leisure Group, Merlin Entertainments Group, The British Hospitality Association (BHA) and the British Association of Leisure Parks, Piers and Attractions (BALPPA). The Campaign brings together commercial operators and industry bodies, including the Tourism Alliance , and is supported by over 350 companies and associations. A full list is included in Appendix D. 4. In September 2011, officials from HM Treasury (HMT) met the Deloitte/Wason/Nevin team to discuss their report. The officials suggested that the impact of reduced tourism VAT be analysed using a Computable General Equilibrium (CGE) model, and provided the name of Professor Adam Blake of Bournemouth University who built and maintains a CGE model owned by HMRC and used by HMT. Subsequent to the meeting, HMT officials gave permission for Professor Blake to use the core of the existing model on behalf of the Campaign, provided no sensitive data were revealed.
Applying the reduced VAT rate for tourism in the UK is not unprecedented. The 5% rate applies to hotels in the Isle of Man, sale of holiday caravans and small cable car transport. 2 Messrs Wason and Nevin were respectively Partner and Senior Economist at Deloitte at the time of the 1995, 1997 and 1998 reports and were involved in the 2002, 2008, 2010 and 2011 studies.
5. This report presents the results of the analysis using the adapted Government CGE model, compares these results with those of the DPE model in the Deloitte/Wason/Nevin report and reports on discussions concerning these results with HMT officials.
The importance of UK tourism

6. The UK tourism industry is a major contributor to the economy. Research by Deloitte (2010) values this contribution at 52 billion in direct contribution or 4% of GDP, and a further 63 billion in indirect contribution or 4.9% of GDP 3. The UK Tourism Satellite accounts compiled by the Office of National Statistics (ONS) shows that tourism demand was responsible for 3.6% of all goods and services supplied in the UK economy and its direct gross value added (GVA) amounted to 44.6 billion 4 in 2009. However the contribution of the tourism industry to the UK is quantified, one thing is clear: the tourism industry plays a key role in generating growth for the UK economy and should not be underestimated. 7. The industry provides crucial employment opportunities: the number of people employed in businesses directly relating to tourism, or tourism direct employment, amounts to 1.8 million 5, many of whom tend to be entry-level and lower-skilled, thus offering critical employment opportunities in the current climate of economic uncertainty. The majority of employees in this sector are women, who tend to be under-represented in the labour market6. The labourintensive nature of the industry, and the fact that many of these jobs cannot be off-shored, means that tourism plays a crucial role in providing diverse employment opportunities, especially amongst young people and those seeking a start on the employment ladder. 8. In addition, tourism is important to every local authority area in the UK, including rural and seaside communities, many of which are dependent on tourism for their livelihood in the face of much economic uncertainty. Tourism is particularly relevant for Wales and Scotland, where the tourism industry contributes around 5.8% and 4.9% of Welsh and Scottish GDP respectively7.
The impact of a VAT reduction the DPE model

9. The first independent analysis of the impact of reduced rates of VAT on tourism and the UK economy in 1995 was based on comprehensive research, including case studies of tourism VAT changes in other countries and detailed analysis of the price sensitivity of UK tourism. Based on
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Deloitte (2010) Economic Contribution of the Visitor Economy ONS (2012) The Economic Importance of Tourism: UK Tourism Satellite Account 2009 5 Research by Deloitte (2010) calculates the amount jobs supported by the tourism industry to be 2.5 million 6 ONS (2012) The Economic Importance of Tourism: UK Tourism Satellite Account 2009 7 Deloitte (2010) Economic Contribution of the Visitor Economy
this research Messrs Nevin and Wason developed a fiscal model to illustrate the potential impact of the VAT reduction. The fiscal model was developed and refined for subsequent studies, resulting in the Nevin/Wason DPE model in the Deloitte/Wason/Nevin report completed in February 2011.
10. A report for the EU in 2007 on the impact of reduced VAT rates by Copenhagen Economics ApS concluded that permanently lowering the VAT rate on a particular good (or service) sooner or later will lead to a reduction in the price of the good more or less corresponding to the monetary equivalent of the lower VAT rate. The Nevin/Wason DPE model makes a more cautious assumption that only 60% of the VAT cut will be passed on in lower prices, the remainder being allocated to investment in new or improved facilities, more employment and training and higher wages. It is assumed that 5% will be retained as increased profits. A further assumption is that most of this effect will take place within two years after the VAT cut and the full effect will occur within four years. 11. The immediate impact of cutting VAT on visitor accommodation and attractions from 20% to a reduced rate of 5% would be a loss of VAT yields. However, the base on which VAT is levied will not remain constant. Lower tax rates will feed through to lower prices, which will stimulate higher demand and so increase the total revenue base on which VAT is levied, benefiting the whole economy and not just the tourism sector. Using reasonable and plausible assumptions, the loss of fiscal income from the cut in VAT will more than be made good by additional income tax receipts, savings in social security payments, and an increase in profits, corporation tax payments and tax on dividends. The DPE Model indicates that in total, the net fiscal gain as a result of the VAT reduction is estimated to grow to 835 million per annum by Year 10 following a VAT cut, and the Net Present Value (NPV) of the fiscal gains generated for the Exchequer over 10 years, compared to a no change policy scenario, is 2.6 billion, at 2011 prices. 12. Additional jobs will be created as a result of the higher spending induced by lower VAT rates and lower prices. Based on an average gross turnover per job (full- and part-time) of approximately 35,000 in the attractions sector and 45,000 in the accommodation services sector, the total number of jobs created by higher sector turnover will be 64,000 jobs in accommodation and 14,000 jobs in visitor attractions, representing approximately 52,000 full-time equivalent jobs. It is further assumed that 65% of these jobs will be new jobs that would not exist without the VAT reduction, while 35% will represent displaced jobs.
The impact of a VAT reduction the CGE model

13. The CGE model, before adjustment to reflect some of the assumptions in the DPE model and particular characteristics of tourism, shows a net fiscal cost to the Exchequer of a reduction in VAT on visitor accommodation and attractions. However this cost is far lower than the direct VAT loss. There is actually a small fiscal gain of 77 million in the year prior to the reduced rate becoming effective, followed by a loss of 232 million in 2013 (compared to the direct VAT loss of 1.7 billion in 2013) and slowly increasing year-on-year deficits thereafter.
14. The results of the impact of a reduction in tourism VAT in the CGE model were compared with the results of other hypothetical tax changes as follows: Scenario 1 - a reduction In VAT on accommodation and visitor attractions to 5%; and Scenario 2 Scenario 1, plus a reduction in VAT on food and beverage services to 5% A 2p reduction in the standard rate of corporation tax (simulation CT) A 20% reduction in rates for employers national insurance contributions (NIC) A 1p reduction in the standard VAT rate (VAT).
To make the comparison between these five scenarios more precise, GDP and fiscal impact effects over the nine year period 2012-2020 are discounted and added up. This gives a resulting ratio between fiscal impact to GDP, which can be interpreted as the fiscal cost (when, as is always the case in these results, it is negative) of each pound of GDP gained. The results are: Comparisons between discounted GDP and fiscal impacts from tax comparison scenarios (m, discounted at a rate of 3% p.a.) Scenario 1 Scenario 2 CT NIC VAT Discounted GDP over 9 years 19,271 79,430 29,615 103,354 28,337 Discounted fiscal impact over 9 years -3,493 -18,150 -17,973 -24,603 -17,830 Fiscal impact to GDP ratio -0.18 -0.23 -0.61 -0.24 -0.63 With a ratio of -0.18, reducing VAT on visitor accommodation and attractions represents one of the most efficient, if not the most efficient, means of generating GDP gains at low cost to the exchequer that I have been seen with the CGE model , according to Professor Blake. 15. Professor Blake considered a number of alternative assumptions in the CGE model reflecting those that underlie the DPE model. Not all of these could readily be reflected due to the structure of the CGE model. Of the assumptions discussed, Professor Blake chose to consider four, two assumptions relating to elasticities within the model and two alternate assumptions relating to employment. One of these relates to a (hypothetical) commitment by which the tourism industry, as part of a collaborative agreement, agrees to take on an additional 10,000
workers who have previously been long-term unemployed. These results show substantially higher GDP gains, peaking at 4 billion per year (rather than 3 billion without these additional assumptions), a positive fiscal impact for the first 4 years and a cumulative fiscal impact over the 2012-2020 period that is only slightly negative at -151 million.
Comparing the DPE and CGE model results

16. The DPE and CGE models are constructed in very different ways and comparison between the two is not straightforward. The estimated direct fiscal loss to the Exchequer as a result of cutting VAT on visitor accommodation and attractions after four years is quite close at 479 million in the CGE model before additional assumptions compared to 439 million in the DPE model. However, the composition of this net effect is different and, in addition, the DPE model estimates a multiplied gain of 754 million for the Exchequer from taxation gains elsewhere in the supply chain. 17. Both CGE and DPE models have advantages and limitations. According to the Inter-American Development Bank, results from CGE models should be used as road maps for policy implementation, which are advised to be complemented by additional analytical work using alternative quantitative methods8. 18. As both CGE and DPE models have their place, there is merit in modelling the impact of reduced tourism VAT using both approaches and the Campaign is grateful to HMT officials for having suggested and granted permission for the use of their CGE model. Furthermore, this exploration has led, in effect, to a partial bringing together of the two approaches in the Additional Assumptions that have been applied by Professor Blake to the CGE model. This scenario in th e CGE model with additional assumptions represents, arguably, the most comprehensive analysis to date of the likely impact of reduced tourism VAT rates. Professor Blake and the consultants to the Campaign came to the agreement that in summary, based on re asonable and plausible assumptions, the modelling exercise seems to support a general case that a reduction of VAT on tourism services would be fairly close to fiscal neutrality. 19. One of Professor Blakes conclusions from this exercise is that the joint consumption of tourism and leisure products does seem to mean that VAT simulations are substantially different to normal VAT simulations. A limitation of the CGE model as regards tourism is the focus exclusively on the UK economy. To an extent, what the VAT reduction on UK visitor accommodation and attractions is doing is growing the UK economy at the same time as
Inter-American Development Bank website (http://www.iadb.org/en/topics/trade/frequently-askedquestions-faqs,1284.html)
reducing the economy of the rest of Europe. This it is believed by the Campaign will lead to fiscal surpluses over time that will - combined with a basket of complementary policy measures such as increased marketing spend reverse the long-term trend in the decline of the UKs tourism balance of payments and go some way towards achieving the Prime Ministers goal of increasing the proportion of UK residents spend on domestic tourism from 36% to 50%.
20. However, a further important difference between the CGE and DPE models concerns what happens beyond the initial year following the reduction in VAT. Changes in the CGE model are particularly static in nature with a change occurring in the year that tax reductions are implemented and little change thereafter. The Campaign team believe that reducing tourism VAT will have dyn amic benefits as a result of a virtuous circle of sector growth, with higher turnover generating greater profitability, which in turn is partly used to invest in product enhancement, attracting more customers and leading to further growth, as has occurre d in countries where a permanent reduction has been applied to tourism VAT, such as Ireland in the 1980s.
Industry commitment to job creation and growth

21. Professor Blakes CGE analysis with additional assumptions included an adjustment for the effects that the expansion of employment in tourism would have on benefit payments, particularly at a time of high unemployment, and notably youth unemployment. This takes account of the high level of part-time employment and the relatively high proportion of lowskilled employment in tourism. Thus it is believed that expansion of the tourism sector at the present time will create jobs, a significant proportion of which will be taken up by the unemployed, the young and part-time workers, many of whom may be new to the workforce and with limited alternative employment opportunities. The opportunities will arise in all parts of the UK, including seaside resorts and rural communities. 22. A further assumption, to underpin the plausibility of tourism jobs being taken by the unemployed, is that the tourism industry would enter a collaborative agreement including the VAT reduction, along the lines of the French contrat davenir 9, which might include taking on more workers who have previously been long-term unemployed. In the CGE model with additional assumptions, it is assumed that an additional 10,000 long-term unemployed would be taken into employment in visitor accommodation and attractions.
The contrat davenir between restaurant owners in France and the French government included industry commitments regarding remuneration, holidays and training and accompanied a reduction in VAT on restaurant meals in 2009.
23. As part of a government decision to reduce VAT on visitor accommodation and attractions the industry would be willing to explore a series of further commitments that would seek to ensure that the benefits of the VAT reduction would reach consumers, employees, suppliers and the economy as a whole. Such commitments might encompass: passing on at least 50% of the VAT reduction in the form of lower prices; creating an agreed number of new jobs, including those for young people; increasing spend on staff training, working with the Department of Business Innovation & Skills; and investing in improvements to the tourism product, thereby generating demand in building services.
These assumptions were to an extent tested by a survey of Campaign supporters undertaken in January 2012. Over 95% of over 200 respondents said that if a 5% VAT rate were achieved some or all of it would be passed on. Eighty-two per cent said they would invest more in their product/facilities, 67% would employ more people, 57% would invest more in training and just under half (48%) would increase staff wages.
Compliance with the Chancellors taxation principles

24. Consideration has been given by the Campaign to how well the tourism VAT reduction proposal adheres to the key principles that should underpin formulations of tax policy as enumerated in the Chancellors Budget 2011 speech 10.
Growth and Economic Efficiency: Our modelling shows that a VAT cut in the tourism sector could do more to boost growth than the Governments current strategy of reducing the rate of corporation tax. VAT on the tourism sector represents a highly economically distortive tax that adversely affects UK business investment and the balance of payments. The tourism sector has the potential to provide the right kind of jobs that are needed to support the wider government policy agenda of reducing benefit dependency and helping young people, part-time workers and the long-term unemployed to find valuable and structured employment opportunities. Fairness: Not only is the current VAT regime highly distortive, it is uncompetitive too. Key European tourism destinations have cut their tourism sector VAT rate in order to obtain a greater share of European tourist spend. Analysis shows that the UK is an attractive destination to visit, but it is not price competitive.
10
2011 Budget statement by the Chancellor of the Exchequer, the Rt Hon George Osborne MP, http://www.hm-treasury.gov.uk/2011budget_speech.htm
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Certainty and Simplicity: A lower VAT rate will increase demand in the tourism sector and help businesses generate the cash internally to drive investment. Practicability and Coherence : While VAT can be claimed back on some foreign tourist purchases, the system is only partial and can be confusing. Lower VAT payments for items such as accommodation could stimulate tourism spending in other areas of the economy. Sustainability: The tax system faces a range of long-term challenges. A VAT rate cut in the tourism sector can help rebalance the tax system to become more growth supporting, thus sustaining tax revenues in the long-term.
Conclusions 25. Having examined the impact of reduced VAT on tourism using both CGE and DPE models, the
Campaign is strongly of the view that reducing VAT on visitor accommodation and attractions will create jobs and stimulate growth throughout the economy at a time of great need, and at very low risk to Exchequer income. 26. It is believed by the Campaign that cutting VAT on tourism will lead to fiscal surpluses over time that will - combined with a basket of complementary policy measures such as increased marketing spend and improved visa regulations and procedures reverse the long-term trend in the decline of the UKs tourism balance of payments and go some way towards achieving the Prime Ministers goal of increasing the proportion of UK residents spend on domestic tourism from 36% to 50%. 27. This is not a request for stimulus or support for the tourism sector. This policy is commended as a measure to assist long-term and sustainable growth for the UK economy. The tourism sector is willing to explore working with the Government to support 10,000 long-term unemployed back into work to make this policy measure fiscally viable.
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1.
1.1
INTRODUCTION AND BACKGROUND

Background to this report
For over 20 years the UK tourism industry has been concerned at the competitive disadvantage which it faces as VAT is applied to tourism in the UK at the standard rate whereas nearly all other EU countries apply VAT to tourism at reduced rates. In recent years this disadvantage has intensified due to the recession, increasing international competitiveness, the increase in the UK standard rate of VAT from 17.5% to 20% and additional countries applying a reduced rate to tourism.
1.2
Tourism VAT in the EU
The rules regarding the way in which member countries of the European Community apply value added tax are set by the European Parliament. The basic rules are simple: Supplies of goods and services subject to VAT are normally subject to a standard rate of at least 15%; and Member States may apply one or two reduced rates of not less than 5% to goods and services enumerated in a restricted list.
These simple rules are however complicated by a multitude of derogations and exceptions granted to certain member states, in some instances a majority of countries. Thus there are also super reduced rates, zero rates and parking rates. In 2007, the EU carried out an assessment of the impact of reduced rates applying to locally supplied services, including restaurant services, notably in terms of job creation, economic growth and the proper functioning of the internal market . The assessment was based on a study carried out by Copenhagen Economics AS. The Copenhagen Economics report found a strong correlation between reduced rates of VAT and employment, demonstrating that reduced rates of VAT have a significant role to play in stimulating employment. Examples where a case for reduced VAT rates can be made include: Services with a high proportion of relatively low-skilled workers (hotels, restaurants and tourism are specifically quoted examples); and Goods and services that are seen as having merit. Specific examples include cultural e vents, theatre and museum tickets and weekend breaks at hotels.
The restricted list of goods and services to which EU countries may apply a reduced rate include s tourism11. The majority of EU countries choose to exercise this option to apply reduced VAT to all or
11
Reduced rates may be applied to the following services relevant to tourism: passenger transport; admission to shows, theatres, circuses, fairs, amusements parks, concerts, museums, zoos, cinemas, exhibitions and similar cultural events and facilities; accommodation provided in hotels and similar establishments, including
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part of their tourism sector, because this encourages a sector that is labour-intensive and socially beneficial and confers a competitive advantage over countries that do not do so The VAT rates of the 27 EU member states for components of the tourism sector are shown in Appendix A. Chart 1 overpage shows the rate for hotels of a selection of competitor countries to the UK: Figure 1: Rates of VAT on hotels in selected EU countries
25 20
15 10 5 0
Source: EC: VAT Rates Applied in the Member States of the EU, situation at 1st July 2012
Rates of VAT applied to visitor attractions are complicated by definitions. The following chart provides a guide to rates applying to admissions to cultural services 12:
the provision of holiday accommodation and the letting of places on camping or caravan sites; restaurant and catering services; admission to sporting events; use of sporting facilities.
12
Museums, galleries, zoos and art exhibitions are exempt from VAT on admissions if they qualify as an 'eligible body'. To be an eligible body an organisation must fulfil three criteria: it must not distribute any profit it makes, any profits from admission must be ploughed back into the organisation, and it must be managed and administered on a voluntary basis by people who have no financial interest in its activities.
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Figure 2: Rates of VAT on admissions to cultural attractions in selected EU countries

25 20 15 10 5 0
Source: EC: VAT Rates Applied in the Member States of the EU, situation at 1st July 2012 In the period since mid-2009, there were some notable examples of countries reducing the rate of VAT on parts of the tourism sector, particularly restaurants which were added to the list of sectors to which member states are permitted to apply a reduced rate in May 2009. Examples of changes since then are: 1st July 2009: VAT on restaurant meals in France was reduced from the standard rate of 19.6% to a reduced rate of 5.5% (the reduced rate was increased to 7% in 2012); 1st January 2010: VAT on restaurant meals in Belgium was reduced from the standard rate of 21% to a reduced rate of 12%; 1st January 2010: VAT on hotel accommodation in Germany was reduced from the standard rate of 19% to a reduced rate of 7%; 1st July 2010: VAT on restaurant meals in Finland was reduced from the standard rate of 23% to a reduced rate of 13%; 1st July 2011: VAT on hotel accommodation and restaurant meals in Ireland was reduced from one reduced rate of 13.5% to a lower rate of 9%; and 1st January 2012: VAT on restaurant meals in Sweden was reduced from the standard rate of 25% to a reduced rate of 12%.
More recently, economic pressures have forced a number of countries to increase their standard rate of VAT and in some case to increase the reduced rate at which tourism services are taxed. If the UK were to reduce VAT on tourism to 5% at a time when other countries are increasing theirs, the competitive advantage for the UK would be magnified and go some way to reversing the disadvantage suffered by the UK for the past 20 years and more.
1.3
The Campaign for Reduced Tourism VAT
In 1993 the British Tourist Authority (BTA, now VisitBritain) set up an all-industry VAT Working Group which commissioned Deloitte (then Touche Ross) to undertake a major, independent analysis of the impact that reduced rates of VAT would have on UK tourism and the wider economy. The first The Impact of Reduced Tourism VAT Rates: Discussions with HMT and DPE and CGE Model Results
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report was completed in 1995. Further reports were undertaken for the BTA and subsequently for other clients in 1997, 1998, 2002, 2008, 2010 and 2011. The latest report (February 2011) was commissioned by Bourne Leisure Group and Merlin Entertainments Group and undertaken by Deloitte with Graham Wason and Michael Nevin 13 (the Deloitte/Wason/Nevin report). In the spring of 2011, the current Campaign for Reduced Tourism VAT (the Campaign) was set up by Bourne Leisure Group, Merlin Entertainments Group, The British Hospitality Association (BHA), the British Association of Leisure Parks, Piers and Attractions (BALPPA) and other commercial operators and industry bodies, including the Tourism Alliance. A list of declared supporters is included in Appendix D.
1.4
The Deloitte/Wason/Nevin report
The February 2011 Deloitte/Wason/Nevin report, The Impact of Reduced VAT Rates on British Visitor Accommodation, Attractions, Employment & the Economy, was commissioned by Bourne Leisure Group and Merlin Entertainments Group. It contained a 155-page comprehensive analysis which found, as its predecessors had, that reducing VAT on UK visitor accommodation and attractions to the UKs only prevailing reduced VAT rate of 5%14 would stimulate both domestic and overseas demand, leading to expansion of the sector, the creation of jobs and a fiscal return to HM Treasury that would reverse the long-term trend of Britain's worsening tourism balance of payments. The analysis was based on a detailed fiscal model or dynamic partial equilibrium (DPE) model developed by Messrs Nevin and Wason originally for the Deloitte reports and adapted and expanded subsequently for later reports. Key findings from the model are presented in Section 3 [?] and the full results of the model are set out in Appendix C.
1.5
Meetings with HM Treasury
In March 2011 the Minister for Tourism & Heritage, John Penrose MP, reviewed the Deloitte/Wason/Nevin report and raised a number of questions and issues. The Campaign sent a response to these in April 2011. Following informal discussions, the Minister arranged a meeting between members of the Campaign and David Gauke MP, Exchequer Secretary to the Treasury. Following this meeting, Mr Gauke arranged for officials from HMT to meet the Deloitte/Wason/Nevin team to discuss their report. At that meeting, which took place on 30th September 2011, HMT officials suggested that the impact of reduced tourism VAT be analysed using a Computable General Equilibrium (CGE) model, and
13
Messrs Wason and Nevin were respectively Partner and Senior Economist at Deloitte at the time of the 1995, 1997 and 1998 reports and were involved in the 2002, 2008, 2010 and 2011 studies. 14 The UK currently has a single reduced rate of 5%. Applying the reduced VAT rate for tourism in the UK is not unprecedented. The 5% rate applies to hotels in the Isle of Man, sale of holiday caravans and small cable car transport.
15
provided the name of Professor Adam Blake of Bournemouth University who built and maintains a CGE model owned by HMRC and used by HMT. Subsequent to the meeting, HMT officials gave permission for Professor Blake to use the core of the existing model on behalf of the Campaign, provided no sensitive data were revealed. Professor Blake was asked to carry out this work in October 2011 and presented his findings in June 2012. His key findings are summarised in Section 3 of this report and his full analysis is set out in Appendix B.
1.6
Contributors to this report
Contributors to this report include the following: Professor Adam Blake, Deputy Director of the International Centre for Tourism & Hospitality Research , Bournemouth University. Adams research interests are in the areas of estimating the economic impact of tourism and special events, modelling the economic effects of government policies on tourism and the distributional effects of tourism, including the use of tourism promotion as a means of poverty alleviation in developing countries. Martin Couchman, Deputy CEO, British Hospitality Association. Martin is responsible for coordinating the BHAs lobbying activities in Whitehall, Ed inburgh, Cardiff and Brussels. He chairs the Social Affairs Committee of HOTREC (the hotel and restaurant industrys European association) and was formerly Secretary to the National Economic Development Council and Chairman of the CBIs Sectoral Employment Issues Committee. Martin was a member of the original VAT Working Group set up by the British Tourist Authority in 1993. Dr Jonathan Gillham, Economist, PwC LLP. Jonathan specialises in Computable General Equilibrium (CGE) modelling and the analysis of tax policy impacts at the sectoral level. He has worked for a range of clients in this area in both the UK and overseas. Prior to joining PwC Jonathan worked as an economist in HM Revenue and Customs and HMT where he worked primarily as a tax and macroeconomist. Jonathan holds a PhD in economics from the University of Nottingham. Michael Nevin, Director, Nevin Associates Ltd. Michael is an economist and qualified accountant. He has worked for the European Investment Bank in Luxembourg, the London Docklands Development Corporation in the late 1980s and established the Edinburgh-based Caledonian Economics in 1997. As a Managing Consultant at Deloitte in the 1990s he was the senior economist on the team that assessed the impact of a tourism VAT reduction for the Deloitte reports in the 1990s. Andrew Tong, Policy & Economics, Deloitte MCS Ltd. Andy led the work undertaken by the Deloitte team on the report on the impact of reduced VAT rates on British visitor accommodation, attractions and the wider economy, undertaken jointly with Graham Wason and Michael Nevin . Andy led Deloittes work for VisitBritain on assessing the economic case for the visitor economy in the UK.
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Graham Wason, Tourism Respect, Chairman of the Campaign for Reduced Tourism VAT. A graduate of hotel and tourism management, Graham has fulfilled operational roles in Europe and Africa and provided tourism policy, strategy and marketing advice over five continents to the United Nations World Tourism Organization (UNWTO), World Travel & Tourism Council, many national governments, private sector operators and others. He authored the UNWTOs publication Tourism Taxation: Striking a Fair Deal. As Tourism Consulting Partner at Deloitte, he led the team that undertook the 1995, 1997 and 1998 reports on the impact of reduced VAT for the British Tourist Authority. He is a board member of the English Association of Self-Catering Operators.
Messrs Wason and Nevin have been involved in seven reports on the impact of reduced VAT on UK tourism between 1995 and 2011. Messrs Wason, Nevin and Tong worked together on the Deloitte/Wason/Nevin report of February 2011. Although not directly involved in this study, also relevant is Dr Roger Perman who undertook detailed econometric modelling of the price sensitivity of tourism for the studies on the impact of reduced tourism VAT in 1995, 1998, 2008 and 2011. Dr Perman is Reader at the University of Strathclyde, teacher of Business Economics and Econometrics in France, and has major research interests and publications in the fields of applied econometrics and business and environmental economics.
1.7
Structure of this Document
Section 2 of this report provides a brief review of the importance of tourism to the UK economy. Section 3 summarises key results from the Nevin/Wason DPE model in the Deloitte/Wason/Nevin report of February 2011. The results of the model are presented in full in Appendix C. Section 4 contains key results from the CGE model as presented in Professor Blakes analysis. The full report is set out in Appendix B. Section 5 presents a comparison of the results of the DPE and CGE models and an analysis of differences between the assumptions that underlie them. Section 6 analyses the tourism VAT reduction proposal against the key taxation principles outlined by the Chancellor of the Exchequer. Section 7 records discussions between HMT officials and Contributors to this report. Section 8 raises issues regarding how to make the reduction in VAT on visitor accommodation and attractions work for the UK economy. Section 9 of this document summarises our conclusions from this analysis.
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2.
2.1
The Importance of Tourism to the UK

Overview
The UK tourism industry is a major contributor to the economy. Research by Deloitte (2010) values this contribution at 52 billion in direct contribution or 4% of GDP, and a further 63 billion in indirect contribution or 4.9% of GDP 15. The UK Tourism Satellite accounts compiled by the Office of National Statistics (ONS) shows that tourism demand was responsible for 3.6% of all goods and services supplied in the UK economy and its direct gross value added (GVA) amounted to 44.6 billion 16 in 2009. However the contribution of the tourism industry to the UK is quantified, one thing is clear: the tourism industry plays a key role in generating growth for the UK economy and should not be underestimated. The industry provides critical employment opportunities: the number of people employed in businesses directly relating to tourism, or tourism direct employment amounted to 1.8 million17, many of which tend to be entry-level and lower-skilled, thus offering critical employment opportunities in the current climate of economic uncertainty. In particular the majority of employees in this sector are women, who tend to be under-represented in labour market participation 18. The labour-intensive nature of the industry, combined with the fact that many of these jobs cannot be off-shored means that the critical role it plays in providing these employment opportunities should not be underestimated. It is also responsible for the training of workers, especially young people, offering opportunities to improve their skills and job prospects. In addition, its importance to the rural economy should not be overlooked. Local communiti es in these regions are dependent on tourism for their livelihood in the face of much economic 1uncertainty. Tourism is also particularly relevant for Wales and Scotland, where the tourism industry contributes around 5.8% and 4.9% of Welsh and Scottish GDP respectively19.
2.2
Challenges faced by the tourism industry
The decline in international competitiveness The tourism industry continues to face significant challenges. The UK may be ranked 7th out of 139 countries in the World Economic Forums (WEF) Trav el and Tourism Competitiveness Index in 2011, but this masks the fact that it continues to fall short on key areas. For example, it is unclear whether the role played by the tourism industry in generating growth and foreign exchange is being recognised by the Government and this has not gone unnoticed the WEF
15 16
Deloitte (2010) Economic Contribution of the Visitor Economy ONS (2012) The Economic Importance of Tourism: UK Tourism Satellite Account 2009 17 Research by Deloitte (2010) calculates the amount jobs supported by the tourism industry to be 2.5 million 18 ONS (2012) The Economic Importance of Tourism: UK Tourism Satellite Account 2009 19 Deloitte (2010) Economic Contribution of the Visitor Economy
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ranks the UK at 49 for the area of Prioritization of Travel & Tourism, with a particular weakness in government expenditure in this industry20. More worryingly, the UK was ranked 135th out of 139 countries for price competitiveness, with poor performance in the areas of extent and effect of taxation and the hotel price index. The UKs appalling performance in purchasing power parity gives a clear indication of how much more costly it is for tourists to visit the UK relative to other countries. Air passenger duty, visa charges and the 20% value-added tax (VAT) all contribute to the significant costs associated with visiting the UK. This is borne out by data from the International Passenger Survey administered by the ONS, which surveys overseas residents as they leave the UK at the end of their visit. The number of overseas visitors has declined owing to the severity of the global financial crisis and although it picked up in 2011 it remains significantly below the 2007 peak. This period of decline also coincided with the Governments move to increase the rate of VAT from 17.5% to 20% in 2010. Figure 3: Number of overseas visitors to the UK
33,000 32,000 31,000 30,000 29,000 28,000 2005 Source: ONS 2006 2007 2008 2009 2010 2011 in thousands
Figure 4: Growth in number of visits by UK residents by region

20
World Economic Forum Travel and Tourism Competitiveness Report 2011
19
20%
15%
10% 5% 0% -5% -10% -15%
Scotland
Scotland
Scotland
Scotland
Scotland
Scotland
London
London
London
London
London
London
NI
NI
NI
NI
NI
England
England
England
England
England
England
Wales
Wales
Wales
Wales
Wales
2006 Source: IPS
2007
2008
2009
2010
2011
2006 was a good year for the tourist industry: the number of visits grew for the whole of the UK with Wales enjoying a massive 18% increase year-on-year. This growth slowed in 2007 and was followed by a disappointing 2008 and 2009 when most regions experienced declines in visits due to the devastating impact of the financial crisis. Though overall visitor numbers have recovered slightly in 2011, this improvement has not been evenly distributed across the regions. London and England as a whole have seen modest increases while visitor numbers in other regions such as Scotland, Wales and Northern Ireland have yet to recover in the post-crisis environment. The UKs competitiveness is being eroded by other developing countries with massive growth potential such as China and India, whose tourism sectors are expected to grow at a comparable or greater rate than the UK by 2015; by 2019 the tourism sectors in these countries are expected to exceed that of the United States. The global tourism industry has been experiencing price competition for years now, and the increasing price-sensitivity of travellers can only further erode the UKs attractiveness as a tourist destination 21. These are concerns echoed by many within the industry and are borne out by recent surveys of those in the business. Results from the Tourism Business Monitor conducted by VisitEngland in July this year shows that 57% of accommodation establishments report an overall decline in activity, with 7% reporting a decline in guest numbers. Businesses also continue to remain cautious, with only 28% reported to be very confident compared to 41% at Easter22. It is particularly striking that there are no policies yet aimed at leveraging our existing strengths to boost the UKs competitiveness in this area, yet resources are being diverted to areas such as infrastructure spending while important is debatable whether its economic benefits will be widely distributed. This needs to change, particularly when other countries are striving to enhance their attractiveness to visitors.
21 22
World Economic Forum Travel and Tourism Competitiveness Report 2011 Visit England Tourism Business Monitor: Accommodation Report July 2012
20
Wales
NI
2.3
The decline in domestic tourism
Domestic trips have declined recently, with holiday trips in particular falling by nearly 7% in 2010 following an encouraging performance in 2009. 2010 in fact recorded the lowest number of trips between 2006 and 2010 with the exception of 200823. Figure 5: Domestic trips by UK residents
in thousands 128,000 126,000 124,000
122,000
120,000 118,000 116,000 114,000 112,000 2006 Source: The UK Tourist 2010 2007 2008 2009 2010
Spending has also seen an overall decline. The figure below presents the overall decline in real average expenditure per trip on domestic trips by UK residents. In real terms spending has declined after peaking in 2008 through to 2010 and continuing to stagnate in 2011.
Figure 6: Real average expenditure per domestic trip by UK residents
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Visit Britain The UK Tourist 2010
21
170 165 160 155 150 145
2006 prices
2006 2007 2008 Source: VisitEngland, Great Britain Tourism Survey 2011, ONS Prices adjusted using CPI
2009
2010
2011
The growth in the aviation industry, particularly in the low-cost segment, has also served to bring foreign holidays within the reach of price-conscious travellers, further exacerbating this decline. Though the costs associated with the APD, airport and visa charges make up a heavy component of costs on these routes and arguably increases the costs of outbound tourism, it has a far more damaging impact on inbound tourism and on balance negatively affects the tourism balance of payments. So while undeniably costs have fallen, the damaging impact of APD on this sector should also not be overlooked. As a result of the decline in the UKs competitiveness in this sector the tourism balance of payments have deteriorated significantly from the early 1990s, peaking in 2008. This has improved subsequently, but this is likely due to the reduction in spending by UK residents abroad owing to the financial crisis and the subsequent squeeze on their disposable incomes. Figure 7: UK tourism balance of payments and trends in the VAT
Balance of payments millions -5,000 -10,000
25% 20% 15%
-15,000
-20,000 -25,000
10%
5% 0%
Source: ONS
Balance of payments
VAT
22
VAT
A reduction in VAT rates would not only improve the UKs attractiveness as a tourist destination for foreign tourists, but would also encourage UK residents to take up more domestic holidays and divert the holiday spending of UK households towards local b usinesses thus improving the UKs tourism balance of payments. In addition, the resulting increase in demand for tourism services in the UK would provide a much-needed boost to the UK economy, creating more value and employment opportunities for UK residents.
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3.
3.1
The Dynamic Partial Equilibrium Analysis

Development of the DPE Model
The first independent analysis of the impact of reduced rates of VAT on the UK economy was based on comprehensive research undertaken by Deloitte (then Touche Ross) primarily in 1994 and completed in 1995. This analysis included, inter alia: case studies of the impact of changes in tourism VAT rates elsewhere; a market research survey into the response of UK tourism operators to a cut in VAT; an analysis of tourism operating conditions; and detailed assessment of the price sensitivity of inbound tourism to the UK undertaken by Dr Roger Perman. Based on this research Messrs Nevin and Wason developed a fiscal model to illustrate the potential impact of the VAT reduction. The fiscal model was further developed and refined for subsequent studies and for the latest report, completed in February 2011, The Impact of Reduced VAT Rates on British Visitor Accommodation, Attractions and the Wider Economy, commissioned by Bourne Leisure Group and Merlin Entertainments Group and undertaken by Deloitte and Tourism Respect (Messrs Wason and Nevin). The fiscal model in the latest report is a Dynamic Partial Equilibrium (DPE) model. DPE models are based on a restricted range of data, such as the price of a single product, the prices of all other products being held fixed during the analysis. DPE analysis examines the effects of policy action in creating equilibrium only in that particular sector or market which is directly affected, ignoring its effect in any other market or industry, assuming that these will be small and will have little impact if any. A limitation of the DPE model can be seen to be that the impact on the wider economy is excluded though this is typically addressed by the use of a multiplier. Conversely an advantage of these models is their simplicity and the ease with which they can be informed by empirical data and data from case studies. The model used in the Deloitte/Wason/Nevin report is hereinafter referred to as the DPE model or the Nevin/Wason model.
3.2
Pass-through of VAT cuts
Economic theory suggests that where demand is relatively price elastic, a given reduction in the VAT rate (price) will lead to larger than average increase in demand. Producers have an incentive to passon to consumers to generate further demand, and in this instance the tax revenue accruing from the change may increase due to more than proportionate increases in demand. The Danish firm Copenhagen Economics A pS was commissioned by the EU to carry out an overall assessment of the impact of reduced rates applying to locally supplied services, including restaurant services, notably in terms of job creation, economic growth and the proper functioning of the internal market. The report was issued in June 2007. The study considered six case studies where a The Impact of Reduced Tourism VAT Rates: Discussions with HMT and DPE and CGE Model Results
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significant change in VAT rate had occurred, one of which concerned hotels in Finland. The report concluded as follows: The empirical evidence from major changes in VAT rates supports the conclusion that changes of VAT rates to a very large extent are passed on to consumers. And: there is little doubt that permanently lowering the VAT rate on a particular good (or service) sooner or later will lead to a reduction in the price of the good more or less corresponding to the monetary equivalent of the lower VAT rateIn economics jargon, there will be a strong tendency towards full pass-through. The Nevin/Wason DPE model assumes that a 15 point reduction of VAT from 20% to 5% will feed through as follows: 60% of the reduction will feed through in lower prices; 10% will be used to recruit more workers and pay higher wages; 3% will be allocated to training; 22% will be allocated to investment; and 5% will be allocated to higher profits after investment.
These assumptions were to an extent tested by a survey of BHA members undertaken in January 2012. Over 95% of over 200 respondents said that if a 5% VAT rate were achieved some or all of it would be passed on. Eighty-two% said they would invest more in their product/facilities, 67% would employ more people, 57% would invest more in training and just under half (48%) would increase staff wages. These changes will not feed through instantaneously. Based on evidence of the path of adjustment experienced in Ireland and France, and the dynamic equations in Dr Perman's econometric models, it may take up to four years for the full effects of lower VAT to feed through to lower prices. Initially, sector operators may seek to retain most of the reduction in higher profits, and only over time will competition drive prices down a phenomenon being witnessed currently in the French restaurant sector. For the purposes of the DPE analysis, it is assumed that the path of price adjustment is as follows: 40% of the total price adjustment in Year 1 following the VAT reduction; 80% occurs by Year 2; 90% by Year 3; and 100% by Year 4, after which sector pricing is in a post-reduction equilibrium.
It is the consultants view that these pass-through assumptions are prudent to the point of conservatism. Whilst competitive pressures will force pass-through over time, the period of adjustment can be decreased if major operators commit to passing on a proportion of the reduction in VAT in the form of lower prices with immediate effect. In Finland, where VAT on food services was reduced from 22% to 13% in July 2010, 86% of the decrease was passed through in lower prices by members of the Finnish Hospitality Association, which represents 80% of the sector, in fulfilment of an agreement made with the Finnish government prior to the VAT cut. In France, the pass-through was lower because industry operators had made prior commitments to government regarding The Impact of Reduced Tourism VAT Rates: Discussions with HMT and DPE and CGE Model Results
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remuneration, holidays and training, which left less of the VAT reduction available for price cuts. The way that the VAT reduction was passed through in both cases was consistent with the commitments made by industry operators prior to the reduction. Pass-through should happen on a faster basis with the Price + VAT strategy being adopted by some industry operators to display price changes in a transparent manner.
3.3
The price elasticity of Tourism
Work undertaken by Wason and Nevin at Deloitte, aided by Dr Perman, for the 1995 and 1998 VAT reports, and their subsequent reports for the British Tourist Authority on The Price Sensitivity of International Tourism (2001) and for BALPPA (2008), estimated price elasticity for international tourism to the UK of -1.28. In other words, a ten% decline in the trade-weighted exchange rate of sterling (a proxy for the relative price of UK tourism versus overseas destinations) leads to a 12.8% increase in real UK international tourism receipts. The elasticity of real tourism receipts with respect to the UKs nominal trade weighted exchange rate (price) is approximately 1.2 (i.e. mildly elastic). For the purposes of the Deloitte/Wason/Nevin study in February 2011, a price elasticity of demand of -1.2 was assumed, which is slightly lower than the estimated price elasticity for inbound tourism to the UK of -1.28 reported above. Dr Roger Perman updated his analysis for the 2011 study. The regression indicates that a ten% fall in the price of UK tourism relative to the OECD average tourism, after full adjustment, will lead to a 12% increase in total UK tourism receipts in real (i.e. inflation adjusted) terms. The elasticity of real tourism receipts with respect to OECD GDP (income) is + 0.618 (that is, moderately inelastic). The regression indicates that a ten% rise in OECD countries average real GDP generates, after full adjustment, a 6% increase in total UK tourism receipts in real terms. Therefore, the income elasticity parameters imply that, whereas overseas visitors regard UK tourism as an inferior product i.e. one on which they spend relatively less money as their incomes rise UK residents regard travel abroad as a superior product one on which they spend relatively more as real incomes increase. The implication of this is that the UKs Tourism Balance is likely to continue to deteriorate as real incomes increase, on a no change policy scenario where VAT continues to be levied at the standard rate on tourism and hospitality services. The full adjustment of tourism receipts to their new long-term equilibrium levels (as implied above) takes time. Dynamic simulations in the model indicate that it is likely to take 2 years for 80% of the effects of price changes to filter through to demand, with a further 10% filtering through in year 3.
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3.4
The shadow economy
One important effect of lower VAT rates will be to reduce the size of the shadow economy that part of the economy on which no VAT is levied, either because it is unreported and unofficial or because operators deliberately keep their turnover below the VAT threshold, e.g. by closing during the winter, to avoid the cost and administrative burden of VAT registration. Research undertaken since 2000 by Professor Friedrich Schneider at the University of Linz, Austria, estimates the size the UK Shadow Economy as approximately 15% of the official economy. Further evidence of the growth of the shadow or unofficial economy in the UK is suggested by the Comptroller and Auditor-Generals report on the Audit of Assumptions for Budget 2010. This report indicated that the VAT Gap defined as the difference between the amount that the UK Government should in theory collect from VAT, and the amount that it actually does collect widened from 12% of potential VAT receipts in the early 1990s to 14.5% by 2009/10. These sources suggest that high VAT rates could act as a disincentive to the growth of small enterprises in the sector for example small guest houses that close through the winter, in order to remain below the VAT threshold. They also suggest that there may be under-reporting of turnover, wages and profits in the SME sector, where a significant proportion of sales are made in cash. If the VAT rate in the UK were reduced to 5%, the incentive to avoid the burden of VAT would be reduced and more enterprises could be expected to register for VAT. A figure of 14% has been used as the estimate of the current value of the total (legal and fraudulent) Shadow Economy in the Nevin/Wason fiscal analysis. Evidence from France suggests that the reduction of VAT on restaurant meals has had significant impact in reducing the amount of tax avoidance and evasion in the restaurant and cafe sector there. We have assumed that a reduction in the VAT rate from 20% to 5% could reduce the size of the shadow economy in accommodation and attractions by a third compared with pre-reduction levels.
3.5
The effects of reducing UK VAT to 5%
That most EU Member States levy reduced rates of VAT on visitor accommodation and visitor attractions suggests that they recognise that, as demand for these services is highly price sensitive, higher tax rates could have the perverse effect of reducing tax yields if they result in a significant contraction in demand. The case studies cited in the Deloitte/Wason/Nevin report indicate that major EU Member States such as France and Germany recognise that introducing lower VAT rates to these sectors during a period of economic recession can be a valuable tool in helping to stimulate demand and increase employment. The immediate impact of cutting VAT from 20% to a reduced rate of 5% would be a loss of VAT yields. However, the base on which VAT is levied will not remain constant. Lower tax rates will feed through to lower prices, which will stimulate higher demand and so increase the total revenue base on which VAT is levied. The VAT base will increase for two reasons. Firstly, more international and The Impact of Reduced Tourism VAT Rates: Discussions with HMT and DPE and CGE Model Results
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domestic visitors will take their holidays in the UK as a consequence of more competitive pricing. Secondly, we would expect a progressive broadening of the VAT base in response to the lower rate. At a rate of 20%, small hotels and attractions have an incentive to remain outside the VAT regime if they can. If rates are reduced to 5%, the disincentive to VAT registration will be considerably reduced. Higher expenditure in response to lower VAT rates can be expected to have the following effects: It will generate higher levels of employment in tourism and related services; This increase in employment will generate additional income tax receipts and savings in social security payments; Higher expenditure will also generate an increase in profits and corporation tax payments by sector operators and, to the extent that profits are paid out as dividends, it will also result in a modest increase in tax paid on dividends; and Finally, higher tourism incomes will feed through to higher expenditure in other sectors of the economy, which in turn will generate further tax receipts. Previous estimates of the value of the tourism multiplier suggest it to be of the order of 1.7, implying that every additional 1 of tourism expenditure feeds through to 70p of extra expenditure in other sectors of the UK economy. This figure is underpinned by the work of Oxford Economics for the BHA:
The DPE Model indicates that the direct loss of revenue to the Exchequer from reducing VAT rates on accommodation would amount to 1,017 million in the first year following a VAT cut, while the loss from reducing VAT rates on visitor attractions would be 201 million. This loss would be off-set by gains which would build up over the years following the VAT reduction, as the impact of price cuts and additional investment in the sector feeds through to higher demand from both overseas and domestic tourists compared to a scenario where VAT continued to be levi ed at 20%. Figure 8: Net Fiscal Impact of a VAT Reduction on Accommodation and Attractions over Time
Source: Nevin/Wason DPE Model By Year 10, the annual indirect fiscal gains accruing to the Exchequer are calculated to be as follows: The Impact of Reduced Tourism VAT Rates: Discussions with HMT and DPE and CGE Model Results
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56 million from the VAT on higher turnover stimulated by increased visitor numbers in the visitor accommodation sector, and 11 million in the visitor attraction sector. 30 million from a widening of the VAT base of the accommodation sector, and 4 million from the visitor attraction sector 177 million from income tax on new jobs created by higher turnover in the accommodation sector, and 46 million in the visitor attraction sector; 38 million from income tax on higher incomes generated by higher margins, of which 32 million would be generated in the accommodation sector and 6 million in the attraction sector; 228 million from savings in social security payments, of which 182 million would be generated in the accommodation sector, and 46 million in the visitor attraction sector; 91 million from corporation tax generated by improved margins, of which 78 million would be generated in the accommodation sector and 13 million in the visitor attraction sector; 133 million from corporation tax generated by higher turnover, of which 111 million would be generated in the accommodation sector and 22 million in the visitor attractions sector; and 53 million from additional income tax paid on increased dividends, of which 45 million would be generated in the accommodation sector and 8 million in the visitor attractions sector.
In addition, we calculate that there will be additional gains from the multiplied effects of increased expenditure elsewhere in the economy. The fiscal value of these multiplier effects is computed to be 820 million generated by the accommodation sector and 158 million by the visitor attraction sector by Year 10. In total, the net fiscal gain as a result of the VAT reduction is estimated to grow to 835 million per annum by Year 10 following a VAT cut, based on the assumptions input to the DPE model. The Net Present Value (NPV) of the fiscal gains generated for the Exchequer over 10 years, compared to a no change policy scenario, is 2.6 billion, at 2011 prices. The reduction would also result in net job creation in the sector, and the generation of additional foreign exchange for the UK. There could be further net gains as a result of some UK residents switching from holidays abroad to holidays at home, at least for their second holiday. In addition, there could be a dynamic benefit as a result of a virtuous circle of sector growth, with higher turnover generating greater profitability, which in turn is partly used to invest in product enhancement, attracting more customers and leading to further growth, as occurred in the Republic of Ireland in the 1980s. Taking these factors into account, we have estimated that only 40% of the total impact of a VAT reduction is felt in the first year following the reduction, rising to 80% in the second year, 90% in the third year and 100% by Year 4. The Impact of Reduced Tourism VAT Rates: Discussions with HMT and DPE and CGE Model Results
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The implication of this is that the full indirect and multiplied impact of a VAT reduction will take time to feed through, with the result that the Exchequer may suffer net losses in the years immediately following a VAT cut as the immediate loss of yield is not offset by indirect and multiplied gains generated by the demand stimulus. Additional jobs will be created as a result of the higher spending induced by lower VAT rates and lower prices. Based on an average gross turnover per job (full- and part-time) of approximately 35,000 in the attractions sector and 45,000 in the accommodation services sector, the total number of jobs created by higher sector turnover will be: 64,000 jobs in accommodation; and 14,000 jobs in visitor attractions.
Both sectors are highly labour-intensive, and both are characterised by comparatively large numbers of part-time employees. We estimate that approximately 42,500 full-time equivalent jobs will be created in accommodation services, and 9,500 in visitor attractions. A further question is how many of these jobs are additional, as opposed to displaced from employment in other sectors. On the assumptions used in our analysis, 65% of these jobs will be new jobs that would not exist without the VAT reduction, while 35% will represent displaced jobs. This estimate is based on the fact that many industry employees will be young people and part-time workers, many of whom may be new to the workforce and with limited alternative employment opportunities. As well as the monetised economic impacts of greater demand in the visitor economy and employment levels, there are a number of effects that are not quantifiable in the traditional sense. These include: Greater propensity for entrepreneurs to invest in and improve the UK tourism product; Higher economic activity rates; Greater social inclusion; Lower benefit claims; More consumer choice through tourism demand spillovers; Greater propensity for enterprise creation and innovation; Improved Tourism Balance of Payments through reduced outbound and increased inbound spending; Improved outcomes for local tourism economies (both rural and urban); Preservation of cultural and heritage sites; and Regeneration effects arising from demand.
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4.
4.1
The Computable General Equilibrium Analysis

Introduction
At the suggestion of HMT officials, Professor Adam Blake of Bournemouth University was invited to assess the impact of reduced tourism VAT using a Computable General Equilibrium (CGE) model developed for HMRC and used by HMT. The Campaign for Reduced Tourism VAT agreed a contract with Bournemouth University for Professor Blake to undertake this work. The work was carried out during the first six months of 2012 and encompassed significant updating of the model and the inclusion of additional data on the visitor economy. During the course of this work, Professor Blake held a number of meetings with members of and consultants to the Campaign for Reduced Tourism VAT. In accordance with the permission granted by HMT officials for Professor Blake to use the core of the existing model on behalf of the Campaign, access was not provided to the model itself and no sensitive data were revealed. The Campaign's understanding of the content and output of the model is based on Professor Blake's report and discussions in meetings. Therefore no independent assessment of the content or functioning of the CGE model has been undertaken. Professor Blake's report is set out in Appendix B. Key findings are summarised below.
4.2
Computable General Equilibrium Models
CGE models use actual economic data to estimate how an economy might react to changes in policy, technology or other external factors. CGE modelling reproduces the structure of the whole economy encompassing production, households, government expenditure etc. CGE models are useful when the expected effects of policy implementation are complex and to estimate the effect of changes in one part of the economy upon the rest. They are used widely to analyse trade policy and to estimate the economic effects of measures to reduce greenhouse gas emissions. CGE models always contain more variables than equations, so some variables must be set outside the model. These variables are termed exogenous; the remainder, determined by the model, are called endogenous. The choice of which variables are to be exogenous is called the model closure, and may give rise to controversy. For example, some modellers hold employment and the trade balance fixed; others allow these to vary. Variables defining technology, consumer tastes, and government instruments (such as tax rates) are usually exogenous. CGE modelling incorporates many aspects of economic theory and has some advantages, for example, price effects are incorporated into the models, which is important in assessing tax impacts, and they capture a much wider set of economic impacts than partial models. However, they also have limitations. Although quantitative, they are not empirical in the sense of econometric modelling they are basically theoretical with limited possibilities for rigorous testing against experience. Where statistical data are not available, values might be assigned that are not subject to The Impact of Reduced Tourism VAT Rates: Discussions with HMT and DPE and CGE Model Results 31
the wide range of statistical tests that can be used to check data in an econometric or DPE model. The Inter-American Development Bank recommends that the results of CGE models should be focused more on magnitudes, directions, and distributive patterns rather than numeric outcomes themselves. In th at sense, results from CGE models should be used as road maps for policy implementation, which are advised to be complemented by additional analytical work using alternative quantitative methods24.
4.3
The Simulations
As agreed with the Campaign, Professor Blake undertook the following simulations in the CGE model: 1. 2. A reduction in VAT on visitor accommodation and attraction services to 5%, starting in 2013 (Scenario 1); and A reduction in VAT on visitor accommodation, attractions and food and beverage services (excluding alcohol) to 5%, starting in 2013 (Scenario 2).
As stated in the introduction, the Campaign is mindful of the current recessionary climate and the government's current economic policy and has therefore determined that the present focus should be on reduced VAT on visitor accommodation and attractions. The summary results of the CGE model provided below therefore relate primarily to Scenario 1 (accommodation and attractions). Results relating to both Scenarios 1 and 2 are shown in the full report in Appendix B.
4.4
Results before adaptation of the CGE Model
The results of the CGE model, before adaptation to reflect particular characteristics of tourism price sensitivity and employment, are shown in Table 1 of Professor Blake s report in Appendix B (page 37). The results of the VAT reduction on visitor accommodation and attractions show: an increase in GDP over the whole time period, compared to a baseline scenario where the tax changes are not implemented. This is largely a one-off increase in GDP in 2013, which would amount to an increase in GDP growth of 3,049 million (0.2%); a negative net fiscal impact over most of the time period shown; and a pre-announcement effect in 2012, where increased economic activity and increased tax revenues result from investment activity stimulated by the anticipated VAT reduction.
The model shows that the direct reduction in VAT revenues (the change in revenue at baseline quantities and prices) is partly offset by behavioural changes within the model, so that while the direct reduction of VAT revenues in scenario 1 in 2013 is 1,693 million, model results show a net VAT receipt fall of 1,377 million as lower prices lead to increased activity. Reductions in social
24
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security benefits have a modest impact. These benefits reduce as total employment increases, so having a positive fiscal impact. The largest factors contributing to a reduction in the fiscal reductions of the direct VAT loss come through income tax and national insurance contributions, both as a result of higher levels of employment and higher wage levels. The net fiscal cost to the Exchequer of a reduction in VAT on visitor accommodation and attractions is far lower than the direct VAT loss. There is actually a small fiscal gain of 77 million in the year prior to the reduced rate becoming effective, followed by a loss of 232 million in 2013 (compared to the direct VAT loss of 1.7 billion in 2013) and slowly increasing year-on-year deficits thereafter. As regards tourism, the CGE model shows: an increase in domestic tourism of 7%; small increases in inbound tourism demand; and a small reduction in outbound tourism (0.7%)
These changes are particularly static in nature, with a change occurring in the year that tax reductions are implemented, and little change thereafter. The share of UK spending on tourism that is spent domestically increases from just over 42% in the baseline to 43.5%. This demonstrates the effects of the increase in domestic tourism demand combined with the smaller reduction in outbound tourism. While VAT reductions would bring the UK closer to domestic tourism having a 50% share, they on their own would not be enough to reach that level.
4.5
Comparison of a cut in tourism VAT with other tax measures
The results of the impact of a reduction in tourism VAT in the CGE model were compared with the results of the following tax changes: A 2p reduction in the standard rate of corporation tax (simulation CT) A 20% reduction in rates for employers national insurance contributions (NIC) A 1p reduction in the standard VAT rate (VAT).
In Professor Blakes CGE report, these three measures are compared with the two tourism VAT reduction scenarios, viz: Scenario 1 - a reduction In VAT on accommodation and visitor attractions to 5%; and Scenario 2 Scenario 1, plus a reduction in VAT on food and beverage services to 5%
In order to make the comparison between these five scenarios more precise, GDP and fiscal impact effects over the 9 year period 2012-2020 are discounted and added up. This gives a resulting ratio between fiscal impact to GDP, which can be interpreted as the fiscal cost (when, as is always the case in these results, it is negative) of each pound of GDP gained. The results are as follows:
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Figure 9: Comparisons between discounted GDP and fiscal impacts from tax comparison scenarios (m, discounted at a rate of 3% p.a.) Scenario 1 Scenario 2 CT NIC VAT Discounted GDP over 9 years 19,271 79,430 29,615 103,354 28,337 Discounted fiscal impact over 9 years -3,493 -18,150 -17,973 -24,603 -17,830 Fiscal impact to GDP ratio -0.18 -0.23 -0.61 -0.24 -0.63 In terms of GDP impact, the NIC scenario has the largest GDP benefits, followed by Scenario 2 (VAT reduction on visitor accommodation and attractions and out-of-home meals). Scenario 1 (VAT reduction on accommodation and attractions only) has the lowest GDP benefits, although these compare reasonably well with Scenarios CT and VAT. Scenario NIC has the highest fiscal cost, with Scenario 2, CT and VAT having comparable fiscal costs. The fiscal cost of Scenario 1 is much lower. With ratios of -0.18 and -0.23, the fiscal cost of Scenarios 1 and 2 is considerably lower than the reduction in corporation tax (-0.61) and VAT (- 0.63) and below the cost of reducing employers national insurance contributions (-0.24). Indeed, Scenarios 1 and 2 are some of the most efficient, if not the most efficient, means of generating GDP gains at low cost to the exchequer that have been seen with the CGE model.
4.6
Results with Additional Assumptions
Professor Blake was asked to consider a number of alternative assumptions in the CGE model reflecting those that underlie the DPE model. Not all of these could readily be reflected due to the structure of the CGE model. Of the assumptions discussed, Professor Blake chose to consider four. Two assumptions relate to elasticities within the model: A higher elasticity between labour and leisure would demonstrate the effects of looser labour market conditions. Here, this elasticity (1.5 in the standard results above) is set to 2.5 to show how the VAT reductions might affect the economy with higher unemployment; and Different assumptions on the elasticity of demand for tourism, in line with the modelling results from the work of Dr Roger Perman and the DPE model. This results in overall more price-elastic international tourism demand, by replacing elasticities of -1.23 (for holidays), 0.93 (for VFR visits) and -0.12 (other visits, including business) with an elasticity of -1.2.
Two alternate assumptions include employment effects beyond the scope of the CGE model: An adjustment is made for the effects that the expansion of employment in tourism would have on benefit payments, given the high level of part-time employment in tourism; and An additional (hypothetical) commitment is included by which the tourism industry, as part of a collaborative agreement, agrees to take on an additional 10,000 workers who have previously been long-term unemployed.
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The results are shown in the table below. Figure 10: CGE Model Results with Additional Assumptions, Scenario 1 Year Change in GDP (m) Net Fiscal Impact (m) 2012 1,334 437 2013 4,027 243 2014 3,804 135 2015 3,646 47 2016 3,519 -34 2017 3,401 -114 2018 3,280 -198 2019 3,153 -285 2020 3,003 -382 These results show: Substantially higher GDP gains, peaking at 4 billion per year, rather than 3 billion without these additional assumptions. Improved fiscal impact, with the fiscal impact being positive for the first 4 (scenario 1) or 5 (scenario 2) years, rather than just in 2012 without these assumptions. A cumulative fiscal impact over the 2012-2020 period that is positive in scenario 2 (a total net 3.4 billion) and only slightly negative in scenario 1 (-151 million).
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5.
5.1
Comparison of DPE and CGE Model Results

Introduction
The DPE and CGE models are constructed in very different ways and comparison between the two is not straightforward. Our analysis is also hampered by the fact that we have not had access to the CGE model itself. However we have been assisted by Professor Blake in compiling this analysis.
5.2
Differences in results
Table 3 below compares the results of the two models for Scenario 1 only (visitor accommodation and attractions) for the base case, that is, excluding Scenario 2 (restaurant services) and prior to the CGE modelling with additional assumptions. Results are shown four years after a VAT reduction has been implemented to allow for the time for a full adjustment to lower rates. Figure 11: Comparison of results between DPE and CGE models, base case Impact All figures in million CGE Value, Scenario 1, 2016 (prepared June 2012) 1. Direct reduction in VAT receipts 2. Indirect gains in VAT receipts through higher turnover and a reduction in the size of the Shadow Economy 3. Gains in income tax and NI contributions 4. Savings in social security payments to the unemployed 5. Gains in corporation tax 6. Gains in other taxes Total direct impact Multiplier benefits Total direct and indirect impact (1,832) 304.0 DPE Value, Year 4 post-reduction (prepared Feb 2011) (1,146) 100.7
734.0
214.7
26.0
164.5
134.0 155.0 (479.0)
185.8 40.9 (439.4) 753.7 314.3
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It can be seen that, overall, the estimated direct fiscal loss to the Exchequer as a result of cutting VAT on visitor accommodation and attractions after four years is quite close at 479 million in the CGE model compared to 439 million in the DPE model. However, the composition of this net effect is different. In addition, the DPE model estimates a multiplied gain of 754 million for the Exchequer from taxation gains elsewhere in the supply chain.
5.3
Reasons for model differences
Based on discussions between Professor Blake and Campaign members and consultants, the reasons for the differences between the results of the two models appear to be as follows: 1. Loss of direct VAT receipts: the difference in the calculation of the direct reduction in VAT receipts to the Exchequer largely reflects a different initial estimate in the value of the taxation base, caused by: Different data sources numbers in the DPE model are based on the ONS Annual Business Survey, whereas those in the CGE model are based on the 2009 Supply and Use Tables; Different base year. The DPE model was finalised in February 2011 and the CGE model in June 2012. The DPE model uses a base year of 2009; the Supply and Use Tables used for the CGE analysis are also from 2009 but have been updated to a base year of 2012. The RPI increased by 14% between March 2009 and March 2012, so inflation alone accounts for a large part of the nominal difference.
In the results of the DPE model, accommodation sector gross turnover was 20.228 billion, of which 14.986 billion was represented by accommodation services and 5.242 billion by food and beverage services. Using ONS Annual Business Enquiry data, accommodation services net turnover (excluding food and beverages) was estimated as 13.01 billion. By contrast, the CGE turnover figure was 17.584 billion net of VAT. This difference in net turnover would arithmetically translate into a difference of (17.584 13.001) billion x 15% = 687 million for a VAT reduction of 15 points from 20% to 5%. 2. Indirect gains in VAT receipts: the computation of indirect VAT receipts from increased sector turnover and a lower shadow economy is greater in the CGE than the DPE model. This reflects the higher turnover base to which these gains apply (see note 1 above). It may also reflect differences in assumptions of how reductions in VAT feed through to greater sector demand. In the DPE model, it is assumed that 60per of the VAT reduction from 20% to 5% would feed through to lower prices (taking four years for the full price effect to feed through), while 10% would be allocated to higher salaries, 3% to training, 22% to investment, and 5% to higher profits. The price elasticity of demand was estimated as -1.2: i.e. a 1% fall in prices would lead to a 1.2% increase in demand, with positive demand responses also felt in response to higher salaries, greater investment and improved training.
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Also assumed was a dynamic adjustment pass-through of price cuts, with 40% of the total price adjustment in Year 1, 80% in year 2, 90% in year three and 100% in year four. The CGE results do include multiplier effects here and elsewhere, so part of the increase in VAT receipts comes from increased economic activity throughout the economy, but the CGE model cannot split this into indirect and induced effects, so a direct comparison with the assumptions in the DPE model is not possible. The DPE model is based to an extent on extensive work on the price sensitivity of tourism carried out by Dr Perman and others. This suggests that lower prices caused by partial passthrough of the reduction in VAT will have a greater impact on increasing foreign visits to the UK and on reducing visits overseas by UK residents than are shown in the CGE model. As a result, the DPE suggests that a reduction in VAT on visitor accommodation and attractions will have a far greater positive impact on the UKs tourism balance of payments than is suggested by the CGE analysis. 3. Gains in income tax and NI contributions: these are more than three times as great in the CGE model as in the DPE model, at 734 million compared to 215 million. 4. Social security payments: conversely, savings in social security payments to the unemployed are much lower, at 26 million compared to 165 million. Overall, the sum of [3] and [4] is 760 million in the CGE model, compared to 380 million in the DPE model. The reasons for these wide divergences are not fully understood, but must relate to differences in the assumptions underpinning the employment impact of higher sector demand. The assumptions in the DPE model were as follows: personnel expenses represent 29% of turnover in the accommodation sector, and 51% of turnover in the attractions sector; turnover per job was 45,000 in the visitor accommodation sector in 2009 and 35,000 in the visitor attraction sector, according to ONS Business Survey statistics; the same source gives average remuneration per job (full- and part-time) of 12,400 in the visitor accommodation sector and 15,600 in the visitor attraction sector; the average rate of income tax and National Insurance paid by those in employment is 31.0% (this might be on the high side for workers in low paid employment); 65% of additional jobs are taken by those previously unemployed or economically inactive, saving 5,500 in social security payments made to the average unemployed person p.a. (N.B. this average payment of 5,500 per person p.a. seems low, but was advised by official government sources).
A partial explanation for the difference is that, where aggregate demand for labour rises, the CGE model translates this into a rise in employment and a rise in wages (and the same goes The Impact of Reduced Tourism VAT Rates: Discussions with HMT and DPE and CGE Model Results
38
for when demand for capital rises in terms of increased investment and a rise in returns to capital). This clearly leads to more of the benefits from increased demand going to higher wages and less to increased employment, in the CGE model, compared to the DPE model. So there is a higher impact on income tax and NI contributions and less on social security benefits. 5. Gains in corporation tax: these are somewhat lower in the CGE model (at 135 million) than in the DPE model (186 million). The DPE model assumptions were as follows: an average pre-tax profits margin of 21% - i.e. pre-tax profits are on average 21% of sector turnover (the CGE model might assume a lower pre-tax profits margin); the applicable rate of corporation tax is 24% - implying that approximately 5% of any increase in turnover as a result of lower VAT rates is paid in corporation tax (= 21% x 24%).
The assumptions regarding average corporation tax rates in the two models differ considerably. The CGE model has a substantially lower average corporation tax rate than the DPE model as it includes the effects of corporation tax allowances. The CGE model has the same headline marginal tax rates for large firms as the DPE model, but has lower rates for small firms. The pre-tax profits margins assumed in the two models are very close, with the CGE model having 19% (this comes directly from the Supply and Use table). 6. Gains in other taxes: the only othe r taxes taken into account in the DPE Model were income taxes payable by shareholders on dividends received, which were estimated as 40% of post-tax profits being the approximate dividend distribution ratio of the FTSE Index. The CGE model also takes account of other indirect tax gains such as higher business rates, excise duties etc which were omitted from the DPE model and which might underestimate indirect gains from these sources. Overall, the CGE model estimates indirect gains from other taxes of 155 million in Year 4, compared to just 41 million in the DPE model. 7. Multiplier benefits: multiplier effects are at the heart of the difference between the two approaches. The DPE model uses the Oxford Economics estimate of the tourism multiplier of 1.67 (based on research commissioned by BHA) to estimate multiplied taxation benefits generated by higher turnover both directly through higher VAT yields, and indirectly through higher income and corporation tax and savings in unemployment benefits in other sectors supplying accommodation and attractions. The Oxford Economics multiplier is based on extensive empirical research and analysed detailed cross industry purchasing patterns to calculate the full impact of the sector on the UK economy, incorporating its direct and supply chain effects. This is based on published ONS UK Input-Output tables and published purchasing patterns.
39
8. The nature of the CGE model requires that (a) equilibrium in factor markets means that wages change; (b) tax revenues and expenditure must equal; (c) equilibrium conditions exist in other markets such as through foreign exchange markets. Professor Blakes understanding is that everything that is in an input-output model used by Oxford Economics is also used in the CGE model, but there are additional constraints on the CGE model. For example, reduced tax revenues also have a multiplier effect in the CGE model that reduce s GDP, but this is not included in the Oxford Economics multiplier. 9. Stabilised position: the comparison between the results of both models as set out in section 4.2 above is made four years after the VAT reduction, by which time the full effects of the VAT reduction are assumed to have passed through. It is known from VAT changes here in the UK, and indeed in other countries such as France and Ireland, that it takes time for sector operators to adjust their prices and investment programmes in response to any change in the VAT regime, so the full fiscal and employment impact is not felt instantaneously. There is a clear difference here between the two model approaches - the CGE model does include some constraints on the ability to switch investment programmes quickly, which has some limited dampening effect, but it does assume that prices change quickly. 10. Announcement effect: the DPE model assumes no announcement effects, or changes in behaviour as a consequence of the announced tax changes, ahead of such changes actually being introduced. By contrast, the CGE model assumes that such announcement effects can be significant. In our view this reflects what might be seen as a questionable hypothesis underpinning the CGE model, namely the Rational Expectations Hypothesis , which postulates that economic actors respond rapidly and efficiently to changes in information. Conversely, whilst the extent of announcement effect in the CGE model can be questioned, so can its exclusion from the DPE model.
5.4
Comparison between the DPE model and CGE model with additional assumptions
Professor Blakes report includes a second set of results from the CGE model, based on assumptions arising from discussions with Campaign members and consultants. The four assumptions reflected in this second set of results are: i. Higher labour elasticity: this assumption has been made because the CGE analysis tends to assume relatively full employment over the long-term. In the present recessionary climate with high unemployment, growth in tourism will create employment opportunities for the unemployed and school/college leavers, thus avoiding some displacement of employment from other economic sectors. Elasticity of demand for tourism: based on the extensive work of Dr Roger Perman and others, this assumes more price-elastic international tourism demand by replacing
ii.
40
elasticities of -1.23 (for holidays), -0.93 (for VFR visits) and -0.12 (other visits, including business) with an elasticity of -1.2. iii. Effect on benefit payments: this takes account of the high level of part-time employment in tourism. Labour markets in the CGE model take no account of part-time and full-time employment and the different effects that part-time employment has on benefit claimants. A collaborative agreement with the industry: this assumes that in return for a VAT reduction the tourism industry would commit to taking additional workers out of benefits and into employment along the lines of the contrat davenir, the agreement between restaurateurs in France and the French government that accompanied the VAT reduction on restaurant meals.
iv.
The assumptions relating to higher labour elasticity in the CGE model have a greater impact in saving benefit payments than under the baseline scenario. This appears to be a more optimistic assumption than in the DPE model, boosting GDP by 4 billion (Scenario 1) and 19 billion (Scenario 2) and resulting in close to fiscal neutrality under both scenarios four years following the reduction. It deteriorates after that because of the assumption in the CGE model that under a business as usual scenario, the tourism sector will grow in line with the rest of the economy and there are no dynamic gains over time as a consequence of the cut. The DPE model assumes that the various subsectors subject to the VAT reduction would grow at their historic rates. As regards the assumptions relating to tourism elasticity of demand, we understand that the CGE models the impact of higher tourism expenditure on expenditure in other sectors of the economy. Under the sensitivity analysis, tourism elasticity increases from 0.5 to 1 i.e., whereas under the baseline scenario, each 1 increase in tourism expenditure results in a 50p decline in expenditure on other services in UK, under the sensitivity scenario there is a 1 for 1 substitution effect. This results in a deterioration in the fiscal impact of about 120 million under Scenario 1 (accommodation and attractions only) from 479 million to just over 600 million in Year 4 postreduction (2017). However, based on recent evidence, a more price competitive UK tourism product would result in a switch in demand away from overseas tourism (the Staycation effect), resulting in a net gain in tourism expenditure for the UK substituting for overseas expenditure rather than domestic expenditure, so that we could plausibly make the case that a 0.5 tourism elasticity is a more realistic representation of the likely outcome that a 1.0 tourism elasticity. With regards to this tourism elasticity of demand, Professor Blake has stated: I ran the sensitivity analysis for this in part because this is an important elasticity that we do not have any evidence for, and also partly because it explains a large part of the difference between these simulations and VAT simulations that HMT would have seen in the past with the CGE model. The joint consumption of tourism and leisure products does seem to mean that VAT simulations are substantially differe nt to normal VAT simulations.
41
To an extent, what the VAT reduction on UK visitor accommodation and attractions is doing is growing the UK economy at the same time as reducing the economy of the rest of Europe.
5.5
The number of jobs created
The reduction in VAT on visitor accommodation and attractions will lead to the creation of additional jobs as a result of lower prices and higher spending. The Deloitte/Wason/Nevin report estimated the number of jobs that would be created based on an average gross turnover per job (full- and part-time) of approximately 35,000 in the attractions sector and 45,000 in the accommodation services sector. The total number of jobs created by higher sector turnover will be: 64,000 jobs in accommodation; and 14,000 jobs in visitor attractions.
A further question is how many of these jobs are additional, as opposed to displaced from employment in other sectors. It was estimated that 65% of these jobs will be new jobs that would not exist without the VAT reduction, while 35% will represent displaced jobs. This estimate is based on the fact that many industry employees will be young people and part-time workers, many of whom may be new to the workforce and with limited alternative employment opportunities. The CGE model does not deal with employment explicitly. We have however considered how many additional jobs might be implied by the CGE model results. Based on Annual Business Survey (ABS) data, turnover and employment costs per job were computed as follows (figures relate to the ABS in November 2011 giving data for 2010): Visitor accommodation turnover = 17,682 million; total employment costs = 5,115 million; total jobs = 392,000 (full and part-time); So turnover per job in this sector = (17,682 million / 392,000 jobs) = 45,107, while employment costs per job = (5,115 million / 392,000 jobs) = 13,048, or approximately 29% of turnover per job, i.e. 29% of turnover is (on average) allocated to employee remuneration in the visitor accommodation sector.
In the CGE analysis with additional assumptions, there is an increase in GDP in Scenario 1 in the fourth year following the VAT reduction of 3,519. Dividing this by the turnover per job figure of 45,107 suggests the creation of 78,000 jobs exactly the same figure as in the DPE analysis. The increase in GDP in the CGE model comes about partly from increased employment and partly through increased real wages whereas the calculations above are based on the increased (labour part of) GDP coming only through employment, as it does in the DPE model. At the present time of relatively high unemployment, the extent to which existing wages increase will be limited and it can The Impact of Reduced Tourism VAT Rates: Discussions with HMT and DPE and CGE Model Results
42
be expected that most of the GDP increase will come about as a result of new employment. However, by 2016 there may be more of an inflationary component at work.
43
6.
Principles for a better taxation system: Proposed changes to the UK VAT system and its impact
Introduction
6.1
There are various factors that influence the formulation of tax policy. A key driver is to maximise the sustainability of fiscal revenues, but this objective needs to be counterbalanced against other considerations, namely the economic efficiency of taxes to ensure that distortions to economic behaviour are minimised; the equitability of tax policy, so that the less well-off do not bear a disproportionate burden of taxes; and practical considerations with regard to implementing tax policy, collecting taxes and enforcing tax regulations. Given the importance of the role of tourism in the UK economy highlighted above, it is important that the government policy landscape provides for a more enabling and supportive tax policy which promotes and encourages investment and employment in the tourism industry. As described in the introductory section we propose the following changes to the tourism tax policy using a two-stage approach: Stage 1: A reduced rate of VAT for visitor accommodation and attractions Stage 2: A reduced rate of VAT for out-of-home meals
Below we explain how these proposals adhere to the key principles that should underpin formulations of tax policy as enumerated by the Treasury Select Committee 25, which were echoed in the Chancellors Budget 2011 speech 26. The essence of these principles can be described under the following headings: i. ii. iii. iv. v. Growth and Economic Efficiency Fairness Certainty and Simplicity Practicability and Coherence Sustainability
In Error! Reference source not found. overpage we summarise the performance of proposed hanges to the VAT applied to the tourism sector against the key principles outlined above. We explore each of these in further detail below.
25
House of Commons Treasury Select Committee (2011) Principles of tax policy, Eighth Report of Session 201011 26 2011 Budget statement by the Chancellor of the Exchequer, the Rt Hon George Osborne MP, http://www.hm-treasury.gov.uk/2011budget_speech.htm
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Figure 12: An assessment of proposed changes to tourism VAT, Key: 0=poor, 4= best Economic Overall Positive Implications of Negative Implications of Current objective of evaluation Current tax system tax system taxation of current tax system 1. Growth and Economic Efficiency 1 The majority of European countries have VAT rates in excess of the UKs 20%. For the majority of the economy VAT represents an economically efficient tax. VAT has a different impact on the tourism sector and this translates into a highly distortive tax. The current VAT system does not provide a level playing field for the tourism sector. Lower VAT rates would allow the UK tourism sector to increase its competitiveness and attract more foreign tourists. Investor transparency is limited by a higher VAT rate. An uncompetitive VAT system will make investors less likely to commit funds to the UK tourism sector. Having a higher rate of VAT than competitor nations is distortive due to tourist price sensitivity. Some foreign business tourists can claim some VAT but most cannot this causes confusion. Lower international competitiveness may make VAT revenues difficult to sustain. It is expected that tourisms contribution may decline in the short-medium term as a result of the Olympics very dependent on legacy.
2. Fairness
VAT registration thresholds are currently some of the highest in Europe. This supports some of the smaller businesses in the UK tourism sector. VAT rates in the UK are relatively stable. Although recent attempts to broaden the VAT base have been unsuccessful. VAT is a relatively straightforward tax to collect from a Government perspective.
3. Certainty and simplicity
4. Practicality and coherence
5. Sustainability
The tourism sector makes an important contribution to UK growth and wider tax receipts (not just VAT).
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On balance, the analysis in the table above shows that the current tax regime is economically distortive, uncompetitive and not sustainable. We consider each of these principles in turn:
6.2
Growth and Economic Efficiency
The Government is currently devising a range of policy measures to help secure the economic recovery. These focus on the generation of investment and exports as the key components of economic growth. Some policy measures have been targeted at the whole economy the aspiration of the 10,000 personal income tax allowance and the steps taken to achieve it have encouraged the supply of labour to the market, and the reforms to the corporate tax system encourage investment, and the relocation of profits in the UK and hence job creation. Other policy measures have been focussed on business lending the Green Investment Bank and so called Credit Easing policies are prime examples. Some measures have been focussed on particular sectors of the economy the recent announcement of 40bn of infrastructure investment and policies to increase house building will have substantial benefits for the construction sector. The 2010 Growth Review set out policies aimed at specific sectors, of which tourism was one. Good tax policies encourage growth and investment, and generate minimal distortions to economic incentives and behaviour. The economic efficiency of taxation is therefore a crucial aspect in the formulation of fiscal policy. It is clear from the preceding paragraph that the Government is using the tax system alongside other policy tools to support growth in the way that it sees fit. However, the strategic context in which these decisions are taken means that some policy measures that will provide the government with very good value for money in terms of the growth that they generate will get overlooked. Research commissioned from Professor Adam Blake at the University of Bournemouth quantifies the economically distortive nature of VAT on the tourism sector. The results from Professor Blakes computable general equilibrium (CGE) 27 analysis suggest that a reduction in VAT on visitor accommodation and attraction services to the minimum of 5 percent starting in 2013 results in an increase in GDP over the periods analysed (2012-20), with the largest increase of approximately 3 billion in 2013 and tapering off in subsequent years. These results are supported by the dynamic partial equilibrium (DPE) analysis which exposes the impacts of VAT on the tourism sector in a highly transparent way. In addition to this, Professor Blakes report shows that VAT on the tourism sector is more damaging than corporation tax and it is this key point that we focus on. It is important to get some perspective on this modelling result and qualify it against what other leading academics and institutions are saying. Recent studies by the OECD, which have been corroborated with wider academic evidence (Mirrlees Review, 201128; Gordon and Lee, 200429;
27
A CGE model uses actual economic data to estimate how an economy might react to changes in policy, technology or other external factors and is frequently used by policymakers in determining the impact of policy changes on the economy. Details of the model can be found in the Tourism Respect report. 28 Mirlees Review (2011) Reforming the tax system for the 21st century 29 Y. Lee and R. H. Gordon (2005) Tax structure and economic growth, Journal of Public Economics, Volume 89, Issue 5, June 2005, Pages 1027-1043
46
Kneller, Bleaney and Gemmell 199930; Arnold et al., 201131), suggest that corporate taxes and taxes that are levied on business inputs are the most economically distortive. This means that when they are increased, they create a disproportionately negative effect on GDP, jobs and investment. Figure 13: The impact of different taxes on the economy
Property tax
Consumption tax
Personal income tax
Corporate income taxes
Least harmful
32
Impact on GDP
Most harmful
Source: Arnold et al. (2011) Note: Based on OECD analysis of 21 countries during the period 1971-2004
While the OECD analysis confirms corporate income taxes to be one of the most damaging for growth, it also suggests that consumption taxes (i.e. VAT) are among the most efficient. This widely accepted finding initially appears to be at odds with the findings in Professor Blakes report, but it is important to draw a fundamental distinction between VAT on the tourism sector and the standard rate of VAT levied on wider household consumption. There are 3 important factors that contribute to making tourism sector VAT the distortive tax that it is: Tax on exports: the tourism sector generated nearly 16bn in foreign exchange for the UK economy in 2010. This figure contributes positively to the UK balance of payments. It is in effect an export. By taxing the relatively scarce resource of earned income from overseas, VAT becomes a more distortive tax. Other products that generate overseas income are not liable for VAT, so the taxation of foreign tourists in this way is inequitable. Reducing VAT on UK tourism would lead to an increase in foreign tourism inflows to the UK economy and a rise in foreign exchange earnings. Encourages people to travel overseas: a higher VAT rate in the UK relative to other tourist destinations that may also have the advantage of other lower costs for tourists (food/accommodation etc.) means that UK residents will be more inclined to spend their money overseas. The higher the cost of UK tourism relative to foreign tourism, the greater the outflow of overseas spending by UK residents will be. In effect the high VAT rate is
30
R. Kneller, M. F. Bleaney, N. Gemmell (1999) Fiscal policy and growth: evidence from OECD countries, Journal of Public Economics, Volume 74, Issue 2, Pages 171-190, November 1999 31 J. M. Arnold, B. Brys, C. Heady, . Johansson, C. Schwellnus and L. Vartia (2011) Tax Policy for Economic Recovery and Growth, Economic Journal, Royal Economic Society, vol. 121(550), pages F59-F80, February 2011 32 J. M. Arnold, B. Brys, C. Heady, . Johansson, C. Schwellnus and L. Vartia (2011) Tax Policy for Economic Recovery and Growth, Economic Journal, Royal Economic Society, vol. 121(550), pages F59-F80, February 2011
47
contributing negatively to the UK balance of payments, and should be considered equivalent to a tax that encourages imports. Tax on global business links: in their evaluation of the economic impact of the UK aviation sector Oxford Economics (2006) 33 undertook a panel cointegration assessment of UK sectoral productivity. The study found that a 10% increase in the output of air services would lift productivity and potential output by 0.56% in the long run. This is a strong, well identified causal link. The study makes reference to the links between this productivity gain and business travel growth. In essence, a high rate of VAT on the tourism sector taxes the products that business travellers consume on trips to the UK, making it more expensive for them to travel to the UK. While such a relationship may appear abstract the airline sector and the tourism sector are intertwined. Accommodation, food and flights are all part of the consumption package for an international traveller, whatever the motive. The current VAT regime effectively pushes up the cost of doing business in the UK.
These primary drivers are critical in terms of making the key distinctions as to how VAT works in the tourism sector versus the more established thinking of VAT as a consumption tax. VAT on the nontourism economy may well indeed provide a way of raising revenue with minimum economic damage. However, for the tourism sector this is clearly not the case. A further key point that relates to the results of the CGE modelling can be drawn from the choice of labour supply parameter and the types of workers entering the tourism sector. Traditionally the tourism sector is very labour intensive, often employing large numbers of low skilled or part-time workers. Such characteristics should not be dismissed as unattractive as the tourism sector offers a valuable platform into long-term employment. The CGE report suggests that many of the jobs created by a VAT cut will be taken up by those currently unemployed. This has direct synergies with the Governments current strate gy of incentivising people into the workforce, or to increase their hours of working through the increases in the personal income tax allowance, policies to reduce benefit dependency and the Universal Credit. Studies show that labour supply elasticities for these groups tend to be considerably higher than average. A survey by Keane (2010) 34 points to labour supply elasticities closer to 3 for female workers, while the Mirrlees Review (2010) cites the out of work income elasticity (i.e. the effect of reductions in out of work income on the choice to work) to be higher than standard labour supply elasticities. While the design of this policy measure can be easily rationalised from the supply side of the economy, its success depends fundamentally on these workers having jobs to go to - a new set of incentives without a corresponding reward may demotivate the unemployed and affect their short and long-term employment chances. The tourism sector presents a real opportunity for these workers to enter the labour market, providing an excellent synergy to wider government policy objectives. The sector offers many parttime flexible working opportunities as well as low skill jobs that suit the profiles of the longer-term
33
Oxford Economic Forecasting (2006) The Economic Contribution of the Aviation Industry in the UK, October 2006 34 Keane, M.P (2011) "Labor Supply and Taxes: A Survey," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 961-1075, December.
48
unemployed. The tourism sector is also an attractive place to work for younger people, potentially addressing issues of youth unemployment, and is spread out regionally offering a range of opportunities in areas of high unemployment. The CGE results that are presented in the main paper are relatively cautious in their labour supply assumptions (1.5 is the central estimate), but by increasing the labour supply elasticity within the model, the fiscal cost of the VAT reduction is greatly reduced. The potential for these employment benefits to occur is significantly enhanced by the current high levels of unemployment in the UK. This report does not seek to suggest that the Government slow down its programme of corporate tax cuts and instead focus on reducing the VAT rate in the tourism sector. However, it does provide a crucial insight into where the Government can get real value for money in terms of using tax policy to generate economic growth relative to current policy plans. The economic growth effects brought about by a reduction in tourism VAT are important and should be central to any consideration of this policy proposal. Results from the CGE model show that the actual exchequer cost of the VAT rate cut is considerably lower than the 1.2bn Budget scorecard cost. In the first year of implementation the measure has the potential to raise revenue for the Exchequer due to announcement effects and the bringing forward of investment. In later years, the Exchequer cost increases, but the measure still costs only around one-third of the static scoring methodology used by HM Treasury. In effect the Treasury methodology in this area is instilling a policy bias by not accounting for the full range of economic effects and the complexities of the tourism sector the distortive nature of tourism sector VAT is being wrongly overlooked in the tax policy and wider growth agenda. This point is critical and we revisit it again under the sustainability heading. Wider economic gains should also be considered. The exchange rate can be an overriding concern for foreign tourists when deciding whether or not to visit the UK. However it should be borne in mind that should Sterling strengthen as the UK economy recovers, a reduction in tourism sector VAT may help in offsetting some of these concerns and generate important foreign exchange for UK PLC.
6.3
Fairness
Because the same rate is applied across all income groups, an increase in the VAT results has a disproportionately negative effect on those of lesser means. The Treasurys analysis of the impact of the rise in VAT to 20 percent on different household income levels show that though the burden of the indirect tax is equivalent to 1 percent of the income of the average UK household, those at the bottom decile of the income distribution bear a burden that exceeds 1.5% of their income 35. A reduction in the VAT rate will help to redress this imbalance, particularly because a significant portion of expenditure of lower income households tends to be directed towards tourism-related industries such as recreation and culture and restaurants and hotels (see Figure). Pricing these groups out of leisure activity would be highly inequitable. In addition, the fact that lower-income households tend to be more dependent on employment in this industry makes a compelling case for
35
HM Treasury (2010) Budget 2010 Annex A: Analysis by income distribution
49
reducing the VAT rate, thereby allowing business to expand and increase job opportunities for the vulnerable. Figure 14: Composition of household expenditure by income group
Share of total spending on tourismrelated sectors, % 800
Disposable weekly income, 700 600 500 400 300 20% 15% 10% 5% 0%
Constrained by Blue Collar Circumstances Communities Multicultural City Living Typical Traits Countryside Prospering Suburbs
30% 25%
200
100 0
Disposable weekly household income Share of spending on tourism-related sectors Source: ONS Tourism-related sectors defined as restaurants and hotels, recreation and culture
Creating a level-playing field The UK currently does not apply reduced VAT rates on tourism services compared to the majority of most other EU countries, although it retains that option. Figures 8 to 10 compare the rates of VAT currently being levied in the EU on different aspects of tourism services. It is clear that the UK currently levies VAT rates that tend towards the higher end of the spectrum, particularly on hotel accommodation. Many major European tourism destinations have dedicated lower VAT rates Spain, Italy, Portugal, Greece and France all have lower VAT rates than the UK. Each has their own set of fiscal issues, but they also recognise the importance of gaining a large proportion of tourism spending as a basis for future economic growth.
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Figure 15: Comparison of VAT rates levied on hotel accommodation

30% 25% 20% 15% 10% 5% 0% Belgium Hungary Bulgaria Estonia Poland Czech Republic
Luxembourg
Netherlands
Slovenia
Slovakia
United Kingdom Portugal
Finland
Malta
Cyprus
Germany
Romania
Sweden
Greece
France
Latvia
Source: EC, as at 1st July 2012
Figure 16: Comparison of VAT rates levied on admission to cultural services (shows, cinema, theatre)
30% 25%
20%
15% 10% 5% 0% Czech Republic
Belgium
Estonia
Lithuania
United Kingdom
Luxembourg
Romania
Netherlands
Figure 1: Comparison of VAT rates levied on restaurants
Lithuania
Germany
Denmark
Hungary
Bulgaria
Slovenia
Slovakia
Poland
Malta
Sweden
Finland
Cyprus
France
Greece
Austria
Ireland
Latvia
Spain
Italy
Denmark
Spain
Ireland
Italy
Portugal
Austria
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30% 25% 20% 15% 10% 5%
0%
Belgium Czech Republic United Kingdom
Luxembourg
Lithuania
Netherlands
In the interests of fairness, the Government should not only consider the impact of the VAT in these sectors on lower-income households, it should also consider levelling the playing field for operators in the UK tourism industry that faces stiff international competition.
6.4
Certainty and Simplicity
Reducing the VAT rate will reduce the costs of doing business for firms, improving their cash flow and allowing them to invest and expand their businesses, especially when businesses and particularly SMEs (which operate in the tourism sector in significant numbers) are finding it hard to borrow. A lower tax rate will also increase the viability of prospective businesses in the sector and reduce the incentives for businesses to avoid VAT registration especially smaller enterprises thereby helping the Treasury to increase the tax base. Policy stability is important in creating an enabling environment for doing business, and expectations of future tax policy have a strong influence on production and investment decisions: sudden increases in taxes would impair cash flows particularly when firms have designated funds meant for long-term investment. Should the Government commit to the proposal to reduce VAT, it is crucial that it communicates this in strong and certain terms that these rates will be maintained in the longterm.
Germany
Denmark
Romania
Portugal
Hungary
Bulgaria
Estonia
Slovenia
Slovakia
Poland
Sweden
Finland
Malta
Austria
Cyprus
France
Latvia
Greece
Spain
Ireland
Italy
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6.5
Practicality and Coherence
The distribution of VAT liability for tourists is uneven. The UK has generous provisions for VAT relief for cultural attractions36 and public transport. These play a key role in attracting visitors to the UK. While this may be perceived as a measure to encourage the influx of foreign tourists the high costs of public transport would largely offset any VAT gain. Further, whilst it is true that non-EU residents who visit the UK are eligible for VAT refunds on goods purchased in the UK, these visitors are still liable for VAT applied to services such as hotel accommodation and restaurants. Reducing the VAT rate across this sector will help address this conflict and improve policy coherence. International tourism also tends to be price-sensitive and there is a considerable body of research that points to evidence of such behaviour. A report commissioned by the Department of Culture, Media and Sport estimates the price elasticity of inbound tourists into the UK to be -0.6137, but this is an average weighted elasticity and underlying it are some highly elastic responses from key tourism territories and passenger groups. For instance, a key driver of this elasticity value are elasticities from business travel (-0.18) and visitors arriving in the UK for study purposes (-0.12); whereas leisure elasticities are elastic (-1.23). Destination elasticities measured in the report, will be weighted by the number of business travellers for instance, the USA which carries large numbers of business travellers between London and New York exhibits a much lower elasticity than Spain, which is predominantly leisure travel. The research also shows that passenger groups are also highly sensitive to competitor destination prices. Other research have suggested that this could be higher: the Perman and Nevin (2001) report on the price elasticity of international tourism to the UK estimates the price elasticity of demand of international tourism to be -1.28, which translates into a 12.8 increase in real UK international tourism receipts for a 10 percent decline in the trade -weighted Sterling exchange rate 38. Durbarry (2008) values this at around -2.04 and -2.31 (results for random and fixed effects regressions respectively) 39, which imply that if tourism prices increase by 1% in the UK, tourist arrivals will fall by around 2 percent; whereas a corresponding increase in the real effective tourism price of competing destinations will only increase UKs tourist arrivals by around 0.6 percent, all else being equal. Given that international tourism tends to be price-sensitive, and foreign tourists expenditure on accommodation services and food and beverage serving services account for the largest shares of tourist expenditure (see Figure 2), a rate cut in this area would amount to significant cost savings accruing to tourists and improving the UKs overall price competitiveness, attracting more visitors to its shores. Not only do the accommodation and restaurant sectors stand to benefit: other sectors
36
HM Revenue and Customs VAT Refund Scheme for national museums and galleries http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel= pageVAT_ShowContent&id=HMCE_CL_000178&propertyType=document 37 DCMS (2007) The Drivers of Tourism Demand in the UK, Blake and Cortes-Jimenez, December 2007 38 Graham Wason and Mike Nevin (2001) The Price Sensitivity of International Tourism, report prepared for the British Tourist Authority (currently VisitBritain) 39 Ramesh Durbarry (2008) Tourism Taxes: Implications for Tourism Demand in the UK, Review of Development Economics, 12(1), 2136, 2008
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such as the retail sector will gain from the increase in domestic and international tourists visiting the UK. Figure 2: Composition of inbound tourism expenditure, 2009
millions Other consumption products Accommodation services for visitors Food and beverage serving services Transport-related services Recreation and culture-related activities 425 86 4,368 7,818
2,983 3,673
Travel agencies and other services Source: ONS
6.6
Sustainability
We acknowledge that the current VAT system provides one of the more sustainable bases for UK tax revenues. The OBRs 2011 and 2012 Fiscal Sustainability Reports flag the proposition of an ageing population which would in turn lead to a reduction in income taxation and an increase in VAT. While an ageing population has more leisure time there is a looming implication that this would lead to increase revenues for the domestic tourism sector. Such assumptions are purely speculative, the financial crises hit pension funds hard and retirement assets have deteriorated. The Pensions Policy Institute 40 have raised the issue of many pensioners retiring to a much lower standard of living than expected, pointing to lower leisure consumption. While non-tourism VAT receipts are likely to grow, it is not clear that tourism VAT receipts will be able to follow suit in the short-term. As with the vast majority of sectors of the economy the tourism sector is feeling pressure from the current European economic downturn. As noted above tourism spending is price elastic, it should also be noted that it is income elastic too. So tourism demand suffers by more than the decline in incomes associated with the economic downturn. In addition to this an analysis of the effects of various Olympic Games on the tourism sector carried out by the European Tour Operators Association (EOTA, 201041) paints a bleak picture of the potential tourism gains for the sector, pointing to examples from previous Olympics in Sydney, Athens and Beijing that were characterised by ambitious estimates of tourism flows prior to the
40
41
Pensions Policy Institute (2010) Retirement income and assets: outlook for the future www.pensionspolicyinstitute.org.uk
European Tour Operators Association (2010) Olympic Hotel Demand: Sydney, Athens, Beijing www.etoa.org
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Games and significant visitor drop offs following the Games and potential displacement effects from domestic visitors (i.e. people staying home to watch the Games to avoid the crowds). While some elements of the London tourism industry may benefit significantly from the Olympic Games, other elements will not and early anecdotal evidence from destination operators outside of London suggests lower than usual revenues during the Olympic period. It is acknowledged that the DCMS have announced plans to capitalise on the Olympic legacy through increased visitor numbers, but there is no guarantee that additional tourists will visit the UK if it cannot become more price competitive. While a VAT cut would help offset some of the likely drop off in tourism demand associated with the European Debt crisis and the Olympics, we reiterate, this is not a request for a stimulus or support for the tourism sector. It is acknowledged that all sectors of the economy are currently experiencing economic difficulties. The request for a reduced VAT rate relates to issues of competitiveness, economic efficiency, fairness, simplicity and practicality outlined above. If the VAT rate was cut to an internationally competitive rate, the tourism sector could support sustainable UK growth and increased and more sustainable tax receipts from other revenue streams through higher employment, the knock on effects from this into other sectors and the non-VAT refundable purchases that tourists make. The potential for this effect to occur is underlined in table 2 below. The CGE model is adapted to account for some factors that lie outside of the models normal assumptions (more precise treatment of benefit take-up alternative elasticity assumptions) and an agreement by the tourism sector to take on an additional 10,000 workers who have previously been long-term unemployed. This latter assumption is critical the tax base within the tourism sector gives little flexibility to allow the VAT rate cut to be funded from within the sector based on the HM Treasury static scorecard calculation (unless special NICs, Income tax or Corporate tax rates are levied, which would be impracticable). Achieving the proposed 1.2bn figure from within the sector would effectively destroy any of the competitive gains that the VAT cut would trigger. This is why dynamic analysis of this issue is so important. Figure 18 shows that by using a dynamic scoring method the cumulative fiscal impact of the VAT rate cut coupled with a jobs commitment of 10,000 extra jobs would only cost the Government 151m between now and 2020. There is potential for 3.4bn to be raised over the same period if the VAT cut is extended to food and beverage services.
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Figure 18: Change in GDP and Net Fiscal Impact of VAT reductions Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 Change in GDP (m) 1,334 4,027 3,804 3,646 3,519 3,401 3,280 3,153 3,003 Net Fiscal Impact (m) 437 243 135 47 -34 -114 -198 -285 -382
Job creation is critical to UK growth going forwards and the long-term sustainability of the tax base. There are many ways in which such a policy would work, but the tourism industry is keen to work with the relevant Government departments to make this happen (HM Treasury, HMRC, DWP, BIS and the DCMS). A well defined scheme would ensure only those businesses who took workers on could claim lower rates of VAT and measures would need to be put in place to ensure compliance and that existing workers did not get displaced by employees taken on under the scheme. However, given the relatively low labour market demand for these types of workers, we believe that this represents a unique opportunity to provide groups of people who have struggled to enter the workforce to gain long-term employment opportunity.
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7.
Discussions with HMT Officials in September 2012

Introduction
7.1
This report was sent in draft to HMT officials on 31st August 2012. The report was discussed at a meeting between HMT officials and contributors to the report on 18th September 2012. The analysis of the compliance of the Campaigns tourism VAT proposal with the Governments tax principles, which is set out in Section 6 of this report, was not included within the draft report and was sent to HMT on 17th September as a separate paper.
7.2
Discussions
HMT officials (Officials) thanked the report contributors (Contributors) for undertaking their CGE analysis. The supplementary paper on compliance with tax principles had not yet been reviewed and was not discussed at the meeting. Officials said that they would be preparing a briefing paper for ministers and that the tax principles paper would be considered alongside the CGE report and previous submissions, including the Deloitte/Wason/Nevin report. What has the Campaign been doing for the past year? Contributors responded that they had been working on the CGE analysis as suggested by Officials at their last meeting and this has taken longer than anticipated, mainly because of updating by Professor Blake of their own CGE model. Contributors first met Professor Blake to discuss the tourism CGE analysis in October 2011 and his work on the model was completed at the e nd of June 2012. Why is a reduced rate of tourism VAT being proposed when other EU countries are increasing theirs? Economic pressures are forcing some EU countries to raise their standard rate of VAT and in some cases this has affected tourism. However it is noteworthy that some countries that are facing even greater economic challenges then those faced by the UK, such as Ireland, have further reduced VAT on tourism. The majority of EU countries still apply reduced rates to tourism. Over the past five years a number of countries have reduced VAT on parts of the tourism sector, e.g. Germany, France, Belgium and Finland. If the average VAT rate in other European countries does increase, the UK would have an even greater competitive advantage with tourism VAT at 5% and the returns would increase over those in the CGE model. This would go some way to reversing the position over the last 20 years when the UK has been at a competitive disadvantage.
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What do we propose in the way of fiscal income to make up for the loss of VAT to make our proposal revenue neutral? Contributors have not proposed any new taxes but expressed openness to exploring this with Officials. In addition, it is stated in the CGE report that the Campaign is happy to explore some kind of agreement whereby the industry would make commitments in return for a VAT cut to ensure that the forecast returns are achieved. There are relatively few international tax levers that can be pulled to increase UK competitive ness in tourism, unlike the financial sector with its own tax regime, so it is not easy to find a revenue neutral tax solution. VAT on visitor accommodation is highly distortive and it is time in our view that the Government addressed this as a growth measure. What has been assumed in the CGE model regarding international tourism elasticities and the link between price and international demand? The HMRC CGE model has been adjusted to reflect tourism specifically, for example with regard to inbound, outbound and domestic demand. Elasticities are taken from Professor Blake s own earlier report for DCMS. The model looks in terms of bundles of goods which are purchased by tourists. This adjusted model is different from but very similar to the core HMRC model. Are any of the tourism related sectors in the model purely tourism? None are purely tourism - there is some non-tourism demand for all products in the UK Tourism Satellite Account. What has been assumed in the CGE model regarding the price of hotels? What price increase is assumed as a result of rising demand? Professor Blake referred to the CES Nest (the assumption of a constant elasticity of substitution, i.e. changes in hotel prices would result in increased spending on other items within the basket). Accommodation accounts for around a quarter of tourism spending, although this differs for different types of tourists, so that a 1% decrease in hotel price leads to around a quarter% increase in the price of the bundle of goods within tourism. Of the 11 sectors in total, six are tourism related sectors - air transport, other transport, accommodation, restaurants, tour operators and recreational services. Standard economic theory says that it is good to tax tourism because: VAT is not very distortive; tourism is less taxed generally than other business products; and some of the tax burden is exported. Contributors do not agree that standard economic theory has it that it is good to tax tourism. It can be efficient to tax tourism in developing economies that are also attractive tourism destinations such as Mauritius, which have large inflows of high-net-worth foreign tourists and low domestic and outbound tourism and where there are few other opportunities to generate fiscal income. The The Impact of Reduced Tourism VAT Rates: Discussions with HMT and DPE and CGE Model Results
Comment [WU 1]: One comment I would make would be that there are not a lot of internal tax leavers in the tourism sector that can be pulled i.e. its not like the financial sector where there is a whole separate tax regime. So it is not easy to find a revenue neutral tax solution within the tourism sector. I would also consider flagging accommodation VAT is highly distortive and it is time that the Government looked at it as a growth measure.
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reverse is true, i.e. it is relatively inefficient to tax tourists, in mature and highly competitive markets, such as European economies. While there is evidence to suggest that tourism taxes export the deadweight loss of taxation to non-UK residents, the evidence of Contributors focuses on the distortive nature of the VAT on foreign tourism inflows and the reduction in visitors and tourism receipts that it causes. This far outweighs the deadweight loss argument. Iceland is an example of a country that has increased VAT on tourism. Following the financial crisis, Iceland faced hugely greater challenges than those faced by the UK and took drastic measures. In Iceland domestic and outbound tourism are relatively small compared to inbound tourism, and the country has a unique and relatively price -insensitive tourism product, the reverse of the position in the UK. Furthermore, with a population of 300,000, Iceland should not be given the same weight as Germany, with a population of over 80 million, which reduced VAT on accommodation to 7% in 2010. VAT is an efficient tax and works best without reduced rates and with harmonised standard rates. Contributors agreed that VAT is an efficient tax for mature economies as a whole. They did not agree that VAT is necessarily efficient for tourism due to its distorting effect. The modelling shows that a VAT cut in the tourism sector could do more to boost growth than the Governmen ts current strategy of reducing the rate of corporation tax. VAT on the tourism sector represents a highly economically distortive tax that adversely affects UK business investment and the balance of payments. The tourism sector has the potential to provide the right kind of jobs that are needed to support the wider government policy agenda of reducing benefit dependency and helping young people, part-time workers and long-term unemployed find valuable and structured employment opportunities. Although the EU would like to see a harmonised VAT rate across Europe and no reduced rates, this is inconceivable in the foreseeable future. On the contrary, use of reduced rates has been increasing and a report by Copenhagen Economics for the EU found tourism to be a specific example of a sector where there is a strong case for reduced rates due to the nature of its international competitiveness, price sensitivity and potential for job creation. In addition, Contributors cited Ramsays theory of optimal taxation, whi ch states that the rate of consumption taxes should be inverse to the price elasticity of demand for the good or service taxed. As it is a well-established finding that tourism is price-sensitive, the application of this rule would tend to suggest a lower rate of VAT for tourism than for less price sensitive services, and this might help to explain why EU Member States that have an option to apply a reduced rate of VAT to accommodation do so; in the case of hotels the only exceptions, other than the UK, are three recent accession countries that increased VAT under IMF pressure, and Denmark, the only country in the EU with no reduced rates.
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As inbound tourism is so small compared to outbound and domestic tourism in the UK, and as the sensitivity percentage is so low, inbound tourism is irrelevant. Contributors did not agree with this statement. Inbound tourism to the UK is worth billions of pounds. Although relatively low price sensitivity has been used in the CGE model for prudence, there is an enormous pool of foreigners with a huge choice of destinations so that a small change in price can make a big difference in absolute numbers. Why is the international tourism price sensitivity factor so low and why is there not a larger increase in the number of international tourists? The VAT reduction assumed is 15 points (from 20% to 5%). However the net reduction is less as business visitors can reclaim VAT. Furthermore reduced VAT is assumed to apply only to visitor accommodation and attractions and not to other goods and services on which tourists spend their money. Thus the overall effect on the price of tourism is only a few points. However whilst the decrease in price is small, the pool of international tourists on which to draw is huge and a small percentage fall in price will lead to significantly increased revenue. The weather and the euro exchange rate have a far higher impact on choice of holiday location for British residents than the VAT rate. Contributors agreed that other factors have a major bearing on tourism choice. This is evident in the average number of days spent abroad by UK residents increasing from 6 to 11 days in the period 1989 to 2009. Over this time there has also been a big change in the cost of foreign holidays due to cheaper air travel. However whilst the weather and exchange rates do also have a significant bearing on tourism flows these are factors over which HMT has no direct control whereas it does have direct control over VAT rates. How would our results change if we removed the assumption in the CGE model that the shadow economy would reduce because one third of businesses not currently paying VAT would choose to register? The UK has the highest VAT threshold in the EU, and this has increased from 54,00074,000 over a period of years whereas there is no threshold in France. This assumption would affect fiscal revenue but would have little effect on GDP. Contributors acknowledged that small businesses might not want the administrative burden of complying with VAT regulations. They noted the significant reduction in the shadow economy in France as a result of lower VAT on restaurants but accepted that the high VAT registration threshold in the UK would lessen the impact here. However, there would still be a beneficial impact on the shadow economy in the UK, albeit this might be smaller than currently shown in the CGE model. Do you want the threshold to be removed or reduced for tourism? Contributors responded that it would not be permitted to reduce the threshold for one sector and in any event this was certainly not being requested. On the contrary industry acknowledges the
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Government for the high VAT threshold and saw this as an encouragement to the SME sector, which is important for tourism. Has the impact of businesses applying a 5% VAT rate and reclaiming 20% VAT on supplies been factored in? Contributors confirmed that this has been reflected in the model. Is the table comparing different fiscal measures on page 51 of the CGE report overstated by the expansion of the air transport sector? The model is constrained by data available in the supply and use tables and aviation does not distinguish between freight and passengers. The number is relatively small but distortion might be greater than is shown in the model, for example perhaps 5 to 10% of air transport might have a higher distortive effect. Why should tourism get special treatment over other sectors? Tourism is not asking for special treatment over other sectors but for a level playing field with the rest of the EU. Tourism is one of a very limited number of goods and services that are eligible to have a reduced rate and the majority of EU countries exercise this option, giving them a competitive advantage. How is pass-through of the VAT reduction shown in the model? This is difficult to see because of the way the model is structured. In the DPE model in the Deloitte/Wason/Nevin report, pass-through has been assumed as follows: 60% of the reduction will feed through in lower prices; 10% will be used to recruit more workers and pay higher wages; 3% will be allocated to training; 22% will be allocated to investment; and 5% will be allocated to higher profit after investment.
Hotels in London are operating at over 90% occupancy so why do we want to boost tourism? Average occupancy statistics compiled by industry consultants are based primarily on four- and fivestar hotels and give an inflated impression of overall London business. There was a significant increase in hotel supply in the run-up to the Olympics and the industry is anticipating a dip in occupancy levels in the post-Olympics period. Reducing VAT now would help to boost tourism, maintain high occupancy levels and secure UK tourism as part of the Olympic legacy. A reduced rate of VAT is not being requested because the industry needs support; on the contrary it is requested because tourism is a successful sector that can generate much-needed additional jobs and growth for the UK economy. Even if London hotels were full, reducing VAT will lead to increased
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demand which will overflow into other parts of the country and will stimulate further hotel development in the capital, thus generating jobs in construction and related sectors. Changes to corporation tax and VAT normally produce very different results from those shown in our report. While OECD analysis confirms corporate income taxes to be one of the most damaging for growth, it also suggests that consumption taxes (i.e. VAT) are among the most efficient. This widely accepted finding initially appears to be at odds with the findings in Professor Blakes report. However, it is important to draw a fundamental distinction between VAT on the tourism sector and the standard rate of VAT levied on wider household consumption. There are three important factors that contribute to making tourism sector VAT the distortive tax that it is: Tax on exports: the tourism sector generated nearly 16 billion in foreign exchange for the UK economy in 2010, and this figure contributes positively to the UK balance of payments. Tourism is in effect an export. By taxing the relatively scarce resource of earned income from overseas visitors, VAT becomes a more distortive tax. Other products that generate overseas income are not liable for VAT, so the taxation of foreign tourists in this way is inequitable. Reducing VAT on UK tourism would lead to an increase in foreign tourism inflows to the UK economy and a rise in foreign exchange earnings. Encourages people to travel overseas: a higher VAT rate in the UK relative to other tourist destinations that may also have the advantage of other lower costs for tourists (restaurant meals for example) means that UK residents will be more inclined to spend their money overseas. The higher the cost of UK tourism relative to foreign tourism, the greater the outflow of overseas spending by UK residents will be. In effect the high VAT rate is contributing negatively to the UK balance of payments, and should be considered equivalent to a tax that encourages imports. Tax on global business links: in their evaluation of the economic impact of the UK aviation sector, Oxford Economics (2006) 42 undertook a panel cointegration assessment of UK sectoral productivity. The study found that a 10% increase in output of air services would lift productivity and potential output by 0.56% in the long run. This is a strong, well identified causal link. The study makes reference to the links between this productivity gain and business tourism growth. In essence, a high rate of VAT on the tourism sector taxes the products that business tourists consume on trips to the UK, making it more expensive for them to travel to the UK. While such a relationship may appear abstract, the airline sector and the tourism sector are intertwined. Accommodation, food and flights are all part of the consumption package for an international traveller, whatever the purpose of visit. The current VAT regime effectively pushes up the cost of doing business in the UK.
These primary drivers are critical in terms of making the key distinctions as to how VAT works in the tourism sector versus the more established thinking of VAT as a consumption tax. VAT on the non-
42
Oxford Economic Forecasting (2006) The Economic Contribution of the Aviation Industry in the UK, October 2006
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tourism economy may well indeed provide a way of raising revenue with minimum economic damage. However, for the tourism sector this is clearly not the case. The VAT figures in the table in Appendix A are misleading because admissions to cultural services are shown as 20% in the UK whereas many government museums have free entry. Furthermore EU governments are subject to certain mandatory exemptions. Several entries in the table have explanatory notes that point out differences and exceptions but none is shown for the UK. The table is taken exactly as it is from the EU's own website. It is true that many attractions are free or subject to VAT exemption but this creates distortion with commercial attractions that are forced to charge VAT at 20%. A 5% VAT rate for visitor attractions would reduce distortion. According to taxation literature no tax can be fiscally neutral. Contributors do not agree. Fiscally neutral tax results have been reported in the economics literature since the early 1980s43. Several recent examples exist and Contributors offered to supply further references on request. Furthermore, whilst it might be difficult to achieve fiscal neutrality within one country, reducing VAT on tourism would enable the UK government to increase fiscal revenue at the expense of other countries, rather than at the expense of other sectors within the UK. In other words if there were a CGE model for the whole of the EU, reducing tourism VAT in the UK would see UK fiscal revenue increase whilst that of other countries decreased, and whilst the EU as a whole remained fiscally neutral. If the Campaign were to get into negotiations about a cut in VAT on visitor accommodation and attractions, would we start asking for restaurants to be included? Contributors were asked prior to the first meeting in September 2011 to specify for which sectors of tourism a VAT reduction was sought and they confirmed that in the first stage of the campaign a VAT reduction is requested only for visitor accommodation and attractions, which are the sectors of tourism where the UK is most uncompetitive with the rest of the EU, and not for restaurants. Contributors recognise that the loss of income if VAT were reduced for restaurants would be much too great for the Government to contemplate in the present economic climate without a radical counter-balancing tax increase. This remains the case. If VAT were to be reduced on accommodation and attractions, which the CGE model demonstrates can be fiscally neutral, it would make sense to see the benefits arising in terms of growth in GDP and jobs before deciding whether to extend reduced VAT to other sectors. At that point the Campaign would welcome an opportunity to explore with Officials a VAT reduction on out-of-home meals and counter-balancing measures to make this feasible.
43
Auerbach, A. and Kol itkoff, L. (1982) INVESTMENT VERSUS SAVINGS INCENTIVES: THE SIZE OF THE BANG FOB THE BUCK AND THE POTENTIAL FOR SELFFINANCING BUSINESS TAX CUTS NBER worki ng paper No. 1027
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7.3
Subsequent questions
Following the meeting, Contributors were asked by email for further information on the background to the Tourism & VAT campaign and the industry stakeholders involved in it. Contributors responded that today (and for the past 20 months) the Campaign for Reduced Tourism VAT is led by four bodies: Merlin Entertainments Group (Merlin), the UKs largest operator of attractions Bourne Leisure Group (Bourne), the UKs largest operator of hol iday accommodation British Hospitality Association (BHA); and British Association of Leisure Parks Piers and Attractions (BALPPA).
The Campaign is supported by over 350 businesses, trade associations and others that have actively declared their support for the Campaign. A list of current supporters is available on the Campaign website. The Campaign is chaired by Graham Wason 44. A very brief history of the Campaign is as follows: 1. The (then) British Tourism Authority set up a VAT Working Party in 1993. 2. The BTA VAT Working Party commissioned Deloitte (then Touche Ross) to undertake a major independent analysis of the impact of reduced tourism VAT on the UK economy. Deloitte issued reports in 1995, 1997 and 199845. 3. Further studies were undertaken in 2002, 2008 (for BALPPA) and 201046. 4. Bourne and Merlin commissioned the most recent study (February 2011) 47. 5. In Spring 2011, Bourne, Merlin, BHA and BALPPA agreed to unite their respective campaigns into the present Campaign for Reduced Tourism VAT.
44
Graham Wason uses the trading name Tourism Respect for his tourism consulting activities. He was previously tourism consulting partner at Deloitte, VP Strategy & Development for the World Travel & Tourism Council, Consultant to United Nations World Tourism Organization and Special Adviser to an earlier House of Lords Committee inquiry on tourism. He owns a five-star gold award self-catering business in Somerset. 45 Graham Wason and Michael Nevin were respectively partner and senior economist at Deloitte and led the team responsible for these reports. 46 Undertaken by Graham Wason and Michael Nevin. 47 Undertaken by Deloitte with Graham Wason and Michael Nevin.
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8.
8.1
The Route to Growth

Conclusions from the modelling
As both CGE and DPE models have their place, there is merit in modelling the impact of reduced tourism VAT using both approaches and the Campaign is grateful to HMT officials for having suggested and granted permission for the use of their CGE model. This exploration has led, in effect, to a partial bringing together of the two approaches in the Additional Assumptions that have been applied by Professor Blake to the CGE model. This scenario in the CGE model with additional assumptions represents, arguably, the most comprehensive and plausible analysis to date of the likely impact of reduced tourism VAT rates. A strong case can therefore be made for reducing VAT on visitor accommodation and attractions to stimulate growth in jobs and GDP in the UK economy.
8.2
A well-functioning tax system
In the June 2010 budget the Chancellor outlined four key principles for tax reform to establish the most competitive tax system in the G20 to support current enterprises and attract new business: i. ii. iii. iv. Be efficient and support growth we need a tax system that supports innovation and enterprise; Be certain and predictable because businesses need more certainty on tax; Be simple to understand untangling the web of reliefs and exemptions in the British tax code; And finally, be fair, reward work and support aspiration.
The proposal to reduce tourism VAT scores well against these criteria, particularly points 1 and 4.
8.3
Why tourism?
A valid question raised by David Gauke MP at the meeting with members of the Campaign last year is why tourism should be favoured over other sectors. Responses to this include: i. ii. iii. iv. v. Most sectors of the UK economy are ineligible for reduced VAT. Tourism services are on the restricted list of services in Annex III of the relevant EU Directive. The UK tourism sector is disadvantaged by its high rate of VAT compared to our major European competitors and tourism is particularly price competitive internationally. UK residents will benefit from the reduced cost of days out, weekend breaks and holidays which are socially beneficial. It is the economies of other countries that will partly be funding the VAT reduction. To an extent this measure will create jobs in the UK at the expense of employment in other countries.
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8.4
Creating jobs
Both the DPE and CGE models demonstrate growth in the economy as a result of reduced VAT on visitor accommodation and attractions and this will lead to the creation of jobs. The results of the DPE model suggests the creation of 78,000 jobs, of which some 65% would be created as opposed to displaced from other parts of the UK economy. A simplistic analysis of the CGE model appears to give support to this.
8.5
Industry commitment
As part of a government decision to reduce VAT on visitor accommodation and attractions the industry could be willing to explore a series of commitments that would seek to ensure that the benefits of the VAT reduction would reach consumers, employees, suppliers and the economy as a whole. Such commitments might encompass: passing on at least 50% of the VAT reduction in the form of lower prices; creating an agreed number of new jobs; ensuring that a proportion of new jobs go to the long-term unemployed and to young people; increasing spend on staff training, working with the Department of Business Innovation & Skills; and investing in improvements to the tourism product, thereby generating demand in building services.
These assumptions were to an extent tested by a survey of Campaign supporters undertaken in January 2012. Over 95% of over 200 respondents said that if a 5% VAT rate were achieved some or all of it would be passed on. Eighty-two% said they would invest more in their product/facilities, 67% would employ more people, 57% would invest more in training and just under half (48%) would increase staff wages.
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9.
Conclusions
Our conclusions from modelling the impact of reduced tourism VAT rates using an adaptation of the CGE model used by HMT and comparing the results with those derived from the DPE model in the Deloitte/Wason/Nevin report are as follows: I. The CGE model, before adjustment to reflect some of the assumptions in the DPE model and particular characteristics of tourism, shows a net fiscal cost to the Exchequer of a reduction in VAT on visitor accommodation and attractions. However this cost is far lower than the direct VAT loss. There is actually a small fiscal gain of 77 million in the year prior to the reduced rate becoming effective, followed by a loss of 232 million in 2013 (compared to the direct VAT loss of 1.7 billion in 2013) and slowly increasing year-on-year deficits thereafter. In addition to looking at the impact of a reduction in VAT on visitor accommodation and attractions (Scenario1), Professor Blake also looked at t he combined impact of a reduction on out of home/restaurant meals as well as on accommodation and attractions (Scenario 2). His conclusion from the CGE analysis is that both scenarios are some of the most efficient, if not the most efficient, means of generating GDP gains at low cost to the exchequer that we have seen with the CGE model. Both CGE and DPE models have advantages and limitations. For example, whilst an advantage of CGE models is their potential to capture a much wider set of economic impacts, a limitation is that they are not empirical in the sense of econometric modelling they are theoretical with limited possibilities for rigorous testing against experience. Limitations of the CGE model applied to the impact of reduced tourism VAT are its apparent unsuitability to reflect price sensitivity of domestic and international tourism and the characteristics of tourism employment, particularly at a time of high unemployment. According to the Inter-American Development Bank, results from CGE mo dels should be used as road maps for policy implementation, which are advised to be complemented by additional analytical work using alternative quantitative methods 48. As both CGE and DPE models have their place, there is merit in modelling the impact of reduced tourism VAT using both approaches and we are grateful to HMT officials for having suggested and granted permission for the use of their CGE model. Furthermore, this exploration has led, in effect, to a partial bringing together of the two approaches in the Additional Assumptions that have been applied by Professor Blake to the CGE model. This scenario in the CGE model with additional assumptions represents, arguably, the most comprehensive and plausible analysis to date of the likely impact of reduced tourism VAT rates.
II.
III.
IV.
48
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V.
Professor Blake and the consultants to the Campaign came to the agreement that i n summary, based on reasonable and plausible assumptions, the modelling exercise seems to support a general case that a reduction of VAT on tourism services would be fairly close to fiscal neutrality. However, a further important difference between the CGE and DPE models concerns what happens beyond the initial year following the reduction in VAT. Changes in the CGE model are particularly static in nature with a change occurring in the year that tax reductions are implemented and little change thereafter. The Campaign team believe that reducing tourism VAT will have dynamic benefits as a result of a virtuous circle of sector growth, with higher turnover generating greater profitability, which in turn is partly used to invest in product enhancement, attracting more customers and leading to further growth, as has occurred in countries where a permanent reduction has been applied to tourism VAT, such as Ireland in the 1980s. These reasonably plausible assumptions in the CGE analysis with additional assumptions include an adjustment for the effects that the expansion of employment in tourism would have on benefit payments, particularly at a time of high unemployment, and notably youth unemployment. This takes account of the high level of part-time employment and the relatively high proportion of low-skilled employment in tourism. Thus it is believed that expansion of the tourism sector at the present time will create jobs, a significant proportion of which will be taken up by the unemployed, the young and part-time workers, many of whom may be new to the workforce and with limited alternative employment opportunities. The opportunities will arise in all parts of the UK, including seaside resorts and rural communities. A further assumption, to underpin the plausibility of tourism jobs being taken by the unemployed, is that the tourism industry would enter a collaborative agreement including the VAT reduction, along the lines of the French contrat davenir 49, which might include taking on more workers who have previously been long-term unemployed, in addition to other commitments such as increased expenditure on training and product improvements. In the CGE model with additional assumptions, it is assumed that an additional 10,000 long-term unemployed would be taken into employment in visitor accommodation and attractions. A survey of BHA members carried out in January 2012 provides encouragement to the feasibility of such an agreement.
VI.
VII.
VIII.
49
The contrat davenir between restaurant owners in France and the French government included industry commitments regarding remuneration, holidays and training and accompanied a reduction in VAT on restaurant meals in 2009.
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IX.
One of Professor Blakes conclusions from this exercise is that the joint consumption of tourism and leisure products does seem to mean that VAT simulations are substantially different to normal VAT simulations. A limitation of the CGE model as regards tourism is the focus exclusively on the UK economy. To an extent, what the VAT reduction on UK visitor accommodation and attractions is doing is growing the UK economy at the same time as reducing the economy of the rest of Europe. This it is believed by the Campaign will lead to fiscal surpluses over time that will - combined with a basket of complementary policy measures such as increased marketing spend reverse the long-term trend in the decline of the UK s tourism balance of payments and go some way towards achieving the Prime Ministers goal of increasing the proportion of UK residents spend on domestic tourism from 36% to 50%. Having examined the impact of reduced VAT on tourism using both CGE and DPE models, the Campaign is strongly of the view that reducing VAT on visitor accommodation and attractions will create jobs and stimulate growth throughout the economy at a time of great need, and at very low risk to Exchequer income.
X.
This is not a request for stimulus or support for the tourism sector. This policy is suggested to assist long-term and sustainable growth for the UK economy. The tourism sector is willing to work with the Government to support 10,000 long-term unemployed back into work to make this policy measure fiscally viable.
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APPENDIX A: Rates of VAT in the Tourism Sector in EU Countries

Standard rate Hotel Accommodation 6 9 14 25 7 9 6.5 8 7 9 10 8 12/2157 21 3 1860 7 6 10 8 6 9/2464 8.5 20 9 12 20 Admissions to Cultural Svs (shows/cinema/theatre) Ex, 6 20 14 25 Ex, 7 20 13, 6.551 Ex52, 8 7, 19.6 Ex, 9 10 Ex, 5 Ex, 2158 Ex59, 21 3 27 5 6 Ex, 10 8 Ex, 23 9 8.5 20, Ex 9 6 20 Admissions to Amusement Parks 6 20 14 25 19 20 13 8 753, 19.6 9 21 5 21 21 3 27 18 6 10 8 23 9 8.5 20 9 25 20 Restaurants & Catering Services 1250 20 20 25 19 20 23 8 754 955, Ex56 10 8 21 21 3 27 18 661 1062 863 23 24 20, 8.565 20 13 12 20
Belgium Bulgaria Czech Republic Denmark Germany Estonia Greece Spain France Ireland Italy Cyprus Latvia Lithuania Luxembourg Hungary Malta Netherlands Austria Poland Portugal Romania Slovenia Slovakia Finland Sweden UK
21 20 20 25 19 20 23 18 19.6 23 21 17 21 21 15 27 18 19 20 23 23 24 20 20 23 25 20
Source: EC: VAT Rates Applied in the Member States of the EU, situation at 1st July 2012
50 51
Excludes all beverages Only for the theatre 52 Supplied by bodies governed by public law or by other organisations recognised as charitable by the Member State concerned 53 Amusement parks which do not illustrate any cultural topic are liable to the standard rate of 19.6% 54 Alcoholic beverages are subject to the standard rate 55 Excludes all beverages 56 Catering services supplied to hospital patients and students in school 57 Different rates are shown in different EU schedules 58 Admissions to cinema (film shows) 59 Supplied by non-profit making legal persons 60 In force as of 1st July 2009 61 Alcoholic beverages at the standard rate 62 10% on food, milk & chocolate; 20% on coffee, tea & other alcoholic and non-alcoholic beverages 63 Alcoholic beverages at the standard rate 64 Different rates are shown in different EU schedules 65 Applies to preparation of meals
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APPENDIX B:
PROFESSOR BLAKES REPORT
Tourism Sector VAT Analysis: CGE Modelling Results

This document provides results from the HMRC CGE Model relating to reductions in VAT on accommodation and visitor attractions.
Model
The most recent version of the HMRC CGE Model (Version 7) uses data from the 2009 Supply and Use Tables (ONS, 2011), as well as household and tax data from HMRC sources. This model is updated to a base year of 2012 by (a) ensuring that GDP in the base year is equal to OBR forecasts for 2012 GDP (OBR 2012), and (b) by increasing the headline VAT rate to 20%. The visitor economy is included through the inclusion of data from the 2008 Tourism Satellite Account (ONS, 2011) , with data on total expenditure of tourists taken from international passenger survey data (ONS, 2012 and VisitBritain 2012a), and data from the UK Tourist Survey (VisitBritain 2012b). The model includes 13 types of visitor expenditure. Four types of inbound expenditure (holidays, business, VFR and other) are visitor exports, with a price elasticity of demand defining how overall demand responds to prices (Blake and Corts-Jimnez, 2007; Corts-Jimnez and Blake, 2011). Households spend money on seven types of visitor products, three of them overseas (outbound holiday, VFR and other), three types of domestic tourism (holiday, VFR and other), and one representing tourism leisure day visits. These are categorised so that the holiday components of each are substitutes, the VFR components are substitutes, and the other components are substitutes. Domestic tourism price elasticities are taken from empirical estimates (Blake and CortsJimnez, 2007).
The Simulations
The simulations comprise: 1. a reduction In VAT on accommodation services to 5%, starting in 2013, plus a reduction in VAT on visitor attractions to 5%, starting in 2013. 2. Simulation 1, plus a reduction in VAT on food and beverage service to 5%, starting in 2013. In line with previous analysis (Wason and Nevin, 2011), an additional assumption is imposed that one-third of the shadow economy in the respective sectors will become part of the tax base, as a result of businesses that keep their revenue below the VAT threshold having less reason to do so with the reduced rate. Part of the sales of accommodation, and particularly of food and beverage
71
service, are sales of alcohol. The VAT rate on these sales does not decrease as part of these simulations.
Results
Table 1 shows the change in GDP and net fiscal impact, of the VAT reductions. Scenario 2 is clearly of a higher magnitude than Scenario 1, as the food and beverage service sector is much larger, and pays more VAT, than the accommodation and visitor attractions sectors. Both scenarios show An increase in GDP over the whole time period, compared to a baseline scenario where the tax changes are not implemented. In both cases this is largely a one-off increase in GDP in 2013, which would amount to an increase in GDP growth of 0.2% in scenario 1 and 0.6% in scenario 2. A negative net fiscal impact over most of the time period shown (Figure 1). A pre-announcement effect in 2012, where increased economic activity and increased tax revenues result from investment activity stimulated by the anticipated VAT reduction. This would increase the GDP growth rate by 0.1% in scenario 1 and 0.3% in scenario 2.
Table 1: Change in GDP and Net Fiscal Impact of VAT reductions.

Change in GDP (m) Scenario 1 2012 2013 2014 2015 2016 2017 2018 2019 2020 315 3,049 2,909 2,815 2,734 2,653 2,567 2,476 2,367 Scenario 2 3,306 13,136 12,227 11,579 11,024 10,492 9,931 9,334 8,582 Net Fiscal Impact (m) Scenario 1 77 -232 -323 -402 -479 -559 -642 -729 -824 Scenario 2 950 -1,497 -1,926 -2,281 -2,616 -2,949 -3,298 -3,663 -4,082
72
Figure 1: Net Fiscal Impact (m)
Tax Detail
Details of tax revenues (Tables 2 and 3) show that the direct reduction in VAT revenues (the change in revenue at baseline quantities and prices) is only partly offset by behavioural changes within the model, so that while the direct reduction of VAT revenues in scenario 1 in 2013 is 1,895m, model results show a fall of 1,605m as lower prices lead to increased activity. Reductions in social security benefits have a modest impact. These benefits reduce as total employment increases, so having a positive fiscal impact. The largest factors contributing to a reduction in the fiscal reductions of the direct VAT loss come through income tax and national insurance contributions, both as a result of higher levels of employment and higher wage levels. Table 2: Changes in Tax Revenues and net fiscal effect of benefit payments, scenario 1. million. ------- Net Fiscal Effects within model ------Direct National reductInsurance ion in Income Contrib- Corporation Other VAT VAT Tax utions Tax Benefits taxes* Total 2012 0 -12 56 19 -16 -11 41 77 2013 -1,693 -1,377 546 265 136 37 161 -232 2014 -1,738 -1,428 525 254 135 34 157 -323 2015 -1,784 -1,478 509 246 135 30 156 -402 2016 -1,832 -1,528 495 239 134 26 155 -479 2017 -1,881 -1,580 481 231 133 21 155 -559 2018 -1,931 -1,633 465 222 133 17 154 -642 2019 -1,983 -1,688 449 213 132 12 154 -729 2020 -2,036 -1,746 429 202 131 7 153 -824 * Other taxes includes additional revenue from excise duties and taxes on production, such as business rates. The Impact of Reduced Tourism VAT Rates: Discussions with HMT and DPE and CGE Model Results 73
Table 3: Changes in Tax Revenues and net fiscal effect of benefit payments, scenario 2. million. ------- Net Fiscal Effects within model ------National Insurance Income Contrib- Corporation Tax utions Tax Benefits 488 199 -16 -12 2,978 1,383 727 126 2,890 1,339 737 112 2,839 1,311 745 100 2,800 1,288 753 89 2,764 1,266 762 78 2,724 1,242 770 67 2,679 1,216 779 56 2,615 1,179 786 43
Direct reduction in VAT 2012 2013 2014 2015 2016 2017 2018 2019 2020 -8,981 -9,220 -9,466 -9,718 -9,977 -10,242 -10,514 -10,794
VAT 45 -7,711 -7,977 -8,235 -8,494 -8,757 -9,028 -9,305 -9,595
Other taxes 247 1,000 973 959 949 939 927 912 890
Total 950 -1,497 -1,926 -2,281 -2,616 -2,949 -3,298 -3,663 -4,082
Tourism Detail
In both simulations, the levels of tourism demand (Table 4) show An increase in domestic tourism of 7% in scenario 1 and around 10% in scenario 2. Small increases in inbound tourism demand Small reductions in outbound tourism (0.7% and 1.6%) These changes are particularly static in nature, with a change occurring in the year that tax reductions are implemented, and little change thereafter. The share of UK spending on tourism that is spent domestically (Figure 2) increases, from just over 42% in the baseline to 43.5% in scenario 1 and 44.5% in scenario 2. This demonstrates the effects of the increase in domestic tourism demand combined with the smaller reduction in outbound tourism. While VAT reductions would bring the UK closer to domestic tourism having a 50% share, they on their own would not be enough to reach that level.
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Table 4: Changes in Tourism Demand (% change from baseline) Simulation 1 domestic inbound 0.0% 0.0% 7.0% 1.6% 7.0% 1.6% 7.1% 1.6% 7.1% 1.6% 7.1% 1.6% 7.1% 1.6% 7.1% 1.6% 7.1% 1.6% Simulation 2 domestic inbound outbound 0.2% 0.0% 0.1% 10.1% 2.3% -1.5% 10.1% 2.4% -1.5% 10.1% 2.4% -1.5% 10.1% 2.4% -1.6% 10.1% 2.4% -1.6% 10.1% 2.4% -1.6% 10.1% 2.4% -1.6% 10.0% 2.4% -1.6%
2012 2013 2014 2015 2016 2017 2018 2019 2020
outbound 0.0% -0.6% -0.7% -0.7% -0.7% -0.7% -0.7% -0.7% -0.8%
2012 2013 2014 2015 2016 2017 2018 2019 2020
Figure 2: Domestic Share of Overnight Tourism Consumption
44.5% 44.0% 43.5% 43.0% 42.5% 42.0% 41.5% 2012 2013 2014 2015 2016 2017 2018 2019 2020 base 1 2
Tax Comparisons
Comparisons are shown for the two main simulations (1 and 2) and: A 2p reduction in the standard rate of corporation tax (simulation CT) A 20% reduction in rates for employers national insurance contributions (NIC) A 1p reduction in the standard VAT rate (VAT). All of these scenarios are of different sizes, but the rates have been chosen to have broadly similar fiscal impacts as scenario 2 (Figure 9). In terms of their GDP impact (Figure 10), only the NIC scenario has similar GDP results to scenario 2, with both the VAT and CT scenarios having smaller GDP benefits similar to scenario 1 while incurring the higher fiscal costs of scenario 2. The Impact of Reduced Tourism VAT Rates: Discussions with HMT and DPE and CGE Model Results
75
Figure 9: Fiscal impacts of the tax comparison scenarios (m)
2,000 1,000 0 2012 -1,000 -2,000 -3,000 -4,000 -5,000 2013 2014 2015 2016 2017 2018 2019 2020 1 2 CT NIC VAT
Figure 10: Changes in GDP as a result of the tax comparison scenarios (m)
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 1 2 CT NIC VAT
In order to make the comparison between these five scenarios more precise, GDP and fiscal impact effects over the 9 year period 2012-2020 are discounted and added up (Table 6). This gives a resulting ratio between fiscal impact to GDP, which can be interpreted as the fiscal cost (when, as is always the case in these results, it is negative) of each pound of GDP gained. With ratios of -0.18 and -0.23, the fiscal cost of the scenarios 1 and 2 is considerably lower than the reduction in corporation tax (-0.61) and VAT (-0.63) and below the cost of reducing employers national insurance contributions (-0.24). Indeed, scenarios 1 and 2 are some of the most efficient, if not the most The Impact of Reduced Tourism VAT Rates: Discussions with HMT and DPE and CGE Model Results
76
efficient, means of generating GDP gains at low cost to the exchequer that I have seen with the CGE model.
Table 6: Comparisons between discounted GDP and fiscal impacts from tax comparison scenarios (m, discounted at a rate of 3% p.a.) Scenario 1 19,271 -3,493 -0.18 Scenario 2 79,430 -18,150 -0.23 CT 29,615 -17,973 -0.61 NIC 103,354 -24,603 -0.24 VAT 28,337 -17,830 -0.63
Discounted GDP over 9 years Discounted fiscal impact over 9 years Fiscal impact to GDP ratio
Results with Alternate Assumptions

A second set of results is presented with some alternate assumptions. Two assumptions relate to elasticities within the model: A higher elasticity between labour and leisure would demonstrate the effects of looser labour market conditions. Here, this elasticity (1.5 in the standard results above) is set to 2.5 to show how the VAT reductions might affect the economy with higher unemployment. Different assumptions on the elasticity of demand for tourism, in line with the modelling results from Wason and Nevin (2011). This results in overall more price-elastic international tourism demand, by replacing elasticities of -1.23 (for holidays), -0.93 (for VFR visits) and -0.12 (other visits, including business) with an elasticity of -1.2.
Two alternate assumptions include employment effects that are beyond the scope of the CGE model: An adjustment is made for the particular effects that the expansion of employment in hospitality would have on benefit payments. This takes account of the high level of part-time employment in hospitality (accommodation as well as out-of-home meals). Labour markets in the CGE model take no account of part-time and full-time employment and the different effects that part-time employment has on benefit claimants. It is therefore assumed that additional employment in accommodation and food and beverage service will take additional workers out of benefits and into employment (working more than 16 hours per week) in proportion to (a) expansion in employment in accommodation / food and beverage service, multiplied by (b) the ratio of part-time workers in accommodation / food and beverage less the economy-wide average. An additional (hypothetical) commitment is included by which the hospitality industry, as part of a collaborative agreement including VAT reductions, agrees to take on more workers who have previously been long-term unemployed. This would mean that more of the
77
expansion in employment in hospitality is met from the previously unemployed rather than from workers moving from jobs in other sectors of the economy. In scenario 1 an additional 10,000 long-term unemployed are taken into employment, in scenario 2 a figure of 30,000 is assumed. While these commitments improve the fiscal impact, a GDP cost is also assumed as employers incur additional costs to train these workers.
These additional assumptions lead to Substantially higher GDP gains, peaking at 4bn (scenario 1) and 19bn (scenario 2) per year, rather than 3bn and 13bn without these additional assumptions (Table 7). Improved fiscal impact, with the fiscal impact being positive for the first 4 (scenario 1) or 5 (scenario 2) years (Figure 3), rather than just in 2012 without these assumptions. A cumulative fiscal impact over the 2012-2020 period that is positive in scenario 2 (a total net 3.4bn) and only slightly negative in scenario 1 (-151,000).
Table 7: Results with additional assumptions.

Change in GDP (m) Scenario Scenario 1 2 2012 2013 2014 2015 2016 2017 2018 2019 2020 1,334 4,027 3,804 3,646 3,519 3,401 3,280 3,153 3,003 8,909 19,001 17,807 16,958 16,264 15,619 14,947 14,233 13,322 Net Fiscal Impact (m) Scenario Scenario 1 2 437 243 135 47 -34 -114 -198 -285 -382 2995 1406 921 540 201 -128 -472 -836 -1269
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Figure 3: Net Fiscal Impact (m)

3,500
3,000
2,500 2,000 1,500 1,000 1 2
500
0 -500 -1,000 -1,500 2012 2013 2014 2015 2016 2017 2018 2019 2020
References Blake, A. and I. Corts-Jimnez, 2007. The Drivers of Tourism Demand, report for the Department for Culture, Media and Sport. Corts-Jimnez, I. and A, Blake, 2011. Tourism Demand Modeling by Purpose of Visit and Nationality, Journal of Travel Research , 50(4):421-442. Office for Budget Responsibility, 2012, Economic and fiscal outlook March 2012, supplementary economy tables, table 1.2. ONS, 1011c, Annual Business Survey 2009 - Revised Results. ONS, 2011a. Input-Output Supply and Use Tables, 2011 Edition. ONS, 2011b. Tourism Satellite Account - 2008 - The Economic Importance of Tourism. ONS, 2012. Overseas Travel and Tourism - Monthly Release. Tourism Respect, 2011. The Impact of Reduced VAT on Out-of-Home Meals. VisitBritain 2012a. Inbound Visitor Statistics. VisitBritain, 2012b. Domestic Visitor Statistics Wason, G. and M. Nevin, 2011, Tourism Sector VAT analysis, Deloitte.
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APPENDIX C: DPE Model

Parameter Value, million
Source & Comments
I. Annual Business Inquiry SIC Data Accommodation sector turnover net of VAT in 2008, million 55 Visitor accommodation of which: 55.1 Hotels and similar accommodation 55.2 Holiday and other short stay accommodation 55.3 Camping grounds, recreational vehicle parks and trailer parks 55.9 Other accommodation 13,528 1,362 2,438 182 17,510
NB: This includes F&B sales as w ell as the provision of accommodation services - F&B sales accounting f or approximately one-third of hotel turnover (tbc)
17,510
Source: ONS, 'Annual Business Inquiry: Section I - Accommodation and f ood service activities', Release date 15/06/2010
Accommodation sector VAT payments in 2008, million 55 Visitor accommodation of which: 55.1 Hotels and similar accommodation 55.2 Holiday and other short stay accommodation 55.3 Camping grounds, recreational vehicle parks and trailer parks 55.9 Other accommodation 2,197 200 306 15 2,718
NB: This includes F&B sales as w ell as the provision of accommodation services - F&B sales accounting f or approximately one-third of hotel turnover
2,718
Source: ONS, 'Annual Business Inquiry: Section I - Accommodation and f ood service activities', Release date 15/06/2010
Accommodation sector VAT payments as a% of net turnover in 2008 55 Visitor accommodation
15.5%
Source: Derived f rom ONS, 'Annual Business Inquiry' data - dividing VAT through by net turnover
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of which: 55.1 Hotels and similar accommodation 55.2 Holiday and other short stay accommodation 55.3 Camping grounds, recreational vehicle parks and trailer parks 55.9 Other accommodation
16.2% 14.7% 12.6% 8.2%
Source: Derived f rom ONS, 'Annual Business Inquiry' data - dividing VAT through by net turnover Source: Derived f rom ONS, 'Annual Business Inquiry' data - dividing VAT through by net turnover Source: Derived f rom ONS, 'Annual Business Inquiry' data - dividing VAT through by net turnover Source: Derived f rom ONS, 'Annual Business Inquiry' data - dividing VAT through by net turnover
Attractions sector turnover net of VAT, million 91.03 Historic sites and buildings 91.04 Botanical and zoological gardens & nature reserve activities 93.21 Amusement parks and theme parks
369 562 611 1,542
Source: ONS, 'Annual Business Inquiry: Section R - Arts, entertainment and recreation', Release date 15/06/2010 Source: ONS, 'Annual Business Inquiry: Section R - Arts, entertainment and recreation', Release date 15/06/2010 Source: ONS, 'Annual Business Inquiry: Section R - Arts, entertainment and recreation', Release date 15/06/2010
II. 2011 Baseline Net Turnover and VAT Receipts Forecast position in Year 1 - gross turnover Accommodation sector gross turnover of which: accommodation services hotel F&B services Attractions sector gross turnover Forecast position in Year 1 - net turnover Accommodation sector net turnover of which: accommodation services hotel F&B services Attractions sector net turnover
20,228 14,986 5,242 20,228 1,781
Based on 2008 statistics, increased in nominal terms by 10% to ref lect inf lation & grow th betw een 2008 and 2011
Estimated on the basis that one-third of hotel turnover is accounted f or by F&B sales, tw o-thirds by accommodation Computed on the basis that VAT f orms the same proportion of gross turnover in the attractions sector as in the accommodation sector
17,510 13,001 4,509 17,510 1,542
Based on 2008 statistics, increased in nominal terms by 10% to ref lect inf lation & grow th betw een 2008 and 2011
Estimated on the basis that one-third of hotel turnover is accounted f or by F&B sales, tw o-thirds by accommodation
81
Forecast position in Year 1 - VAT (headline rate 20%) Accommodation sector VAT of which: accommodation services hotel F&B services
3,106 2,306 800 3,106
Computed assuming the same ef f ective yield as in 2008, uprated by a f actor of 20%/17.5%
% of Accommodation Sector Turnover accounted for by Business
40.0%
Business customers can reclaim VAT paid on their services, and hence this element does not represent a net loss to the Exchequer. Source: Consultants ' estimate based on industry data and EU benchmarks (close to the German%age as estimated by IFO, Munich)
Total accomodation services VAT Accommodation services VAT reclaimable by business clients Non-reclaimable VAT om accommodation services % of Attractions Sector Turnover accounted for by Business
2,306 923 1,384 0.0%

Source: Consultants' estimate - it is assumed all attractions' turnover is accounted f or by leisure rather than business customers Computed by multiply ing total VAT charged f or accommodation services, multiplied by the%age accounted f or by business customers w ho can then reclaim it
Attractions sector VAT Attractions sector VAT reclaimable by business clients Non-reclaimable VAT om accommodation services
274 0 274
Source : ONS Business Inquiry data does not provide separate f igures f or VAT f or the attractions sector, so, f or the purposes of the analysis, the same realised VAT rate is assumed as f or the accommodation sector Computed by multiply ing total VAT charged f or attractions, multiplied by the%age accounted f or by business customers w ho can then reclaim it
%age real growth in sector turnover under a "no VAT change" scenario
-1.5%
Source: An extrapolation of historic trends, w hich show that Domestic Tourism Expenditure f ell by an average of just over 4% pa over the period - an overall real decline of 33% betw een 2000 and 2009 - w hile international tourism receipts w ere f lat in real terms. Going f orw ard, it should be noted that the recent VAT cuts on hotels in Germany, and on restaurants in France and Belgium, w ill f urther w orsen the UK's competitive position, so there is no reason to predict a revival in ITR
III. 2011 Baseline% of Net Turnover
82
Accommodation sector: Personnel expenses -% of turnover net of VAT Training expenses -% of turnover net of VAT Investment -% of turnover net of VAT Attractions sector: Personnel expenses -% of turnover net of VAT Training expenses -% of turnover net of VAT Investment -% of turnover net of VAT 51% 5% 16%
Source: Derived f rom ONS data giving total employ ment costs of 687m and payments to sub-contractors of 105m out of total sector turnover of 1,542m in 2008 f or SIC categories 91.03, 91.04 and 93.21 Source: Consultants' estimate, based on c 10% of employee remuneration Source: Derived f rom ONS data giving net capital expenditure of 254m out of total sector turnover of 1,542m in 2008 f or SIC categories 91.03, 91.04 and 93.21
29% 3% 11%
Source: Derived f rom ONS data giving total employ ment costs of 4,813m and payments to sub-contractors of 246m out of total sector turnover of 17,509m in 2008 Source: Consultants' estimate, based on c 10% of employee remuneration Source: Derived f rom ONS data giving total capital expenditure of 1,910m out of total sector turnover of 17,509m in 2008 (acquisitions - disposals)
IVI. Allocation VAT reduction VAT rate applying pre-reduction VAT rate applying post-reduction Total VAT reduction Proportionate allocation Allocated to price cuts Allocated Allocated Allocated Allocated to higher salaries to training to greater sector investment to higher profits
20.00% 5.00% 15.00%
Standard rate applying f rom January 2011 Current UK reduced rate
60% 10% 3% 22% 5% 100% 100%
Source: Consultants' estimates based on case studies, evidence f rom Ireland, France and Germany, and the Copenhagen Economics study - indicating that 60% to 80% of any VAT reduction w ill (af ter f ull adjustment) f eed through to price reductions, brought about by sector competition
Price cut sensitivity factor
83
Adjustment path: % of total price adjustment in % of total price adjustment in % of total price adjustment in % of total price adjustment in
Year Year Year Year
1 2 3 4
40% 80% 90% 100%
Based on evidence of the path of adjustment experienced in Ireland and France, and the dynamic equations in Dr Perman's econometric models NB: It is assumed that the balance not passed through is largely retained in additional prof its
%age allocation of VAT reduction: Lower prices Higher employee remuneration - more staff Greater training expenditure Greater sector investment Higher profits Total reduction in VAT rates
9.00% 1.50% 0.45% 3.30% 0.75% 15.00%
Computed by multiply ing the% reduction in VAT by the% allocation of this reduction Source: Assumed that competitive f orces w ould lead to 7.5% of any VAT cut being passed on in higher w ages, based on evidence f rom Ireland and Germany
Source: Assumed hotel and visitor attraction operators w ould absorb approximately 12.5% of any VAT reduction in higher prof its margins - some of w hich w ould be ploughed back in greater investment in the business
V. Elasticities Price Personnel expenses Training Investment -1.2 0.2 0.2 0.3
Measuring how sector turnover responds to changes in each parameter Source: Derived f rom Roger Perman econometric estimates , October 2010. I.e., each 1% f all in price results in a 1.2% increase in demand. Note this is a low er elasticity than that of 2001, w hen the estimate w as -1.28 Source: Consultants' estimates and case studies. Each 1% increase in employee remuneration real w ages results in a 0.2% increase in sales, as a result of greater productivity. Source: Consultants' estimates and case studies. Each 1% increase in training results in a 0.2% increase in sales, as a result of greater productivity. Source: Consultants' estimates and case studies. Each 1% increase in investment results in a 0.2% annual increase in sales. This is based on an estimated average prof its margin of 30%, so that an investment of 1,000 w ould result in an increase in annual prof itability of 1,000 x (30% x 20%) or 60 (6%). If it w as less than this, it w as unlikely that the investment w ould occur.
VI. Macroeconomic factors
84
Shadow Economy and VAT Base Size of the shadow economy as a% of officially reported turnover 14.00%
Source: University of Linz estimates and Report by the Comptroller and Auditor-General, Audit of Assumptions for Budget 2010, National Audit Of f ice March 24th 2010. This report indicated that the VAT Gap - def ined as the dif f erence betw een the amount that the UK Government should in theory collect f rom VAT, and the amount that it actually does collect - had w idened f rom 12% of potential VAT receipts in the early 1990s to 14.5% by 2009/10 suggesting that the size of the Shadow Economy in the UK may be increasing Source: French evidence since the reduction in VAT on restaurant meals in July 2009. The disincentive f or small companies to remain below the VAT threshold, or f or cash-based transactions to be reported f or tax purposes, w ould be considerably reduced by a VAT reduction
% reduction in the size of the shadow economy post-VAT cut
33.00%
Employment, Income Tax and Social Security Effects Turnover per job: visitor accommodation sector Turnover per job: visitor attraction sector Ratio of Full Time Employment (FTE) equivalents to Total Employment Average remuneration per job: visitor accommodation sector Average remuneration per job: visitor attraction sector Average rate of income tax & National Insurance % of additional jobs taken by those previously unemployed or economically inactive Social security payments - average per person unemployed p.a. Profitability and Corporation Tax Effects %age operating profits margin Pre-tax profits as a% of operating profits 30.0% 70.0%
As many costs are f ixed, any increase in turnover is estimated to increase operating prof its by 30p f or every 1 increase Based on the assumption that 30% of (unadjusted) operating prof its are absorbed by interest payments and other tax deductible non-operating costs, on average
45,000 35,000 0.67 12,400 15,600 31.0% 65.0% 5,500
Source: ONS Business Inquiry data. This gives net sector turnover of 17,509m in 2008, and total sector employ ment of 389,000 (average during the year), equating to turnover per job (f ull- and part-time) of 45,000 Source: ONS Business Inquiry data. This gives net sector turnover of 1,542m in 2008, and total sector employ ment of 44,000 (average during the year), equating to turnover per job (f ull- and part-time) of 35,000 Source: Based on ONS Business Inquiry data, w hich indicates that there are approximately equal numbers of f ull- time and part-time employees in the sector. On the basis that a part-time employee is equivalent to 0.5 f ull time equivalent (FTE), the ratio of FTE to total jobs may be computed as 1/(1+0.5) Source: ONS Business Inquiry data. This gives total employ ment costs of 4,813m in 2008, and total sector employ ment of 389,000 (average during the year), equating to remuneration per job (f ull- and part-time) of 12,400 Source: ONS Business Inquiry data. This gives total employ ment costs of 687m in 2008, and total sector employ ment of 44,000 (average during the year), equating to remuneration per job (f ull- and part-time) of 15,600 Source: Based on standard rate of income tax of 20% plus 11% National Insurance contribution Source: estimate based on the f act that many industry employees w ill be young people & part-time w orkers, many new to the w orkf orce Source: Department f or Work and Pensions - of f icial f igures f or jobseeker's allow ance, housing benef it and council tax benef it
85
Proportion of post-tax profits distributed as dividends %age tax on dividend payouts Applicable rate of corporation tax Multiplier effects Multiplier Base year Real Discount Rate Inflation rate % of total turnover accounted for by overseas visitors: Accommodation services Visitor attractions and amusement parks
40.0% 25.0% 24.0%
Source: FTSE 100 dividend payout ratio, w hich is betw een 35% and 40%. Source: Assumed to equate to the standard rate of income tax Source: Future standard rate of corporation tax, as announced in the June 2010 Budget
1.67 2009 3.50% 2.00%
Gross multiplier - applying f ormula 1/(1-c) w here c = marginal consumption w ithin the UK and is estimated as 40% of any change in income
Treasury Green Book 2003 Edition Based on the Bank of England's CPI target
40.0% 40.0%
Source: Indicative estimate f or accommodation services Source: Indicative estimate f or commercial visitor attractions
86
APPENDIX D:
CAMPAIGN SUPPORTERS as at 18th November 2012

Milsom Hotels Macdonald Hotels Marriott International Merlin Entertainments Group Methodist Holiday Hotels New Steine and Gulliver's Hotels Park Plaza Hotels Europe Premier Cottages Ltd Q Hotels Sleeperz Hotels Starwood Hotels & Resorts TA Hotel Collection Thistle Hotels Town House Collection Travelodge Hotels Ltd Individual Accommodation & Attractions Abacus Hotels Limited Abbey Guest House Abbey Hotel Adelaide House AGM Hotels (Shakespeare Hotel) Allenheads Inn Aitchison Hotels Alvia Guesthouse AM:PM Hotels Amberley House Cottage Holidays Ltd The Anderson Antique Inns Apex Hotels Army & Navy Club Arundell Arms Ash House Hotel Ashleigh House Hotel Atlanta Guesthouse Aultguish Inn Aviary Court Hotel Aylsham Lodge Hotel Badger Towers Balmoral Lodge Hotel Bancourt Hotel Baskerville Arms Hotel Bateman Arms Battledown Bed and Breakfast Bath Hotel Bay Horse Inn BW Beamish Hall Country Beamish Wild Adventure Park Belmont Hotel Bentley Hotel Bermondsey Square Hotel Berry Head Hotel Blanch House Hotel BW Premier Blunsdon House Hotel Bolankan Cottage B&B Boturnell Farm Cottages Bowden Lodge Briarfields Motel and Touring Park Brooklands Hotel East Anglia National National National North Yorkshire National London National National National National National National National National
The businesses and organisations below have actively declared their support for the Campaign for Reduced Tourism VAT. Associations Association for Events Management Education National Association of British Professional Conference Organisers National Association of Conferences and Events National Association of Leading Visitor Attractions National Association of Scotlands Self Caterers Scotland Association of Scottish Visitor Attractions Scotland British Hospitality Association National British Association of Leisure Parks, Piers & Attractions National Bude Area Tourist Board Local Business Visits and Events Partnership National Cheltenham Hospitality Association Local Conference Centres of Excellence National Eventia Exeter Events Industry Alliance National Events Industry Forum National Falmouth & District Hotels Association Local Hotel Booking Agents Association National International Congress & Convention Association National ISES (International Special Events Society) UK Chapter National Lancashire and Blackpool Tourism Board Local London & Partners Local Midland Association for Restaurants, Caterers Hotels and Entertainment Local Meetings Industry Association National Meeting Professionals International UK Chapter National National Outdoor Events Association National New Forest Destination Partnership Local New Forest Tourism Association Local Resort Developments Organisation National South West Tourism Alliance South West Timeshare Consumers Association National Tourism Alliance National Vale Marketing Group: Tourism Association Local Welsh Association of Self Catering Operators Wales West Norfolk Hospitality Association Local Groups Bourne Leisure Group Caravan Club Carluccio's limited Compass Hotels Ltd Farm Stay UK InterContinental Hotels Group, Jumeirah Millennium and Copthorne Hotels Guoman & Thistle Hotels Hilton Worldwide Historic Sussex Hotels Jurys Inn Langham Hotel Group Legacy Hotels and Resorts
National National National National National National London National National National Sussex National London National
Swaffham Abingdon Worcestershire Brighton London Northumberland Muir of Ord Brighton Aberfeldy West Sussex Inverness Cheshire Edinburgh London Devon Somerset Devon East Sussex Inverness Redruth, Cornwall Norwich Cheltenham Southport Torquay Powys, Hereford Herefordshire Cheltenham Devon York Co Durham Co Durham Leicester Lincoln London Brixham Brighton Swindon Cornwall Cornwall Southport Cheltenham Surrey
87
Brown's Hotel (Rocco Forte) BW Bruntsfield Hotel Bryn Bras Castle Budock Vean Hotel Burgh Island Hotel Caer Beris Manor Hotel Cantley House Hotel Caparo Hotels Captains Club Hotel Carlton Club Cavalaire Guest Accommodation Central Hotel Chardon Management Chariet Ltd (Crown Spa Hotel) Chellowdene Guest House Cheltenham Short Breaks (Trading Places) Chessman Hotels Ltd Chester Grosvenor BW Chilworth Manor Hotel Chycara Holiday Complex, Truro Claremont House Hotel Claverton Country House BW Cliffe Hotel Coast Holidays (The Royal Bridlington) Colwall Park Hotel Combe House Hotel Cossington Park Cottage in the Wood The Cove Cranleigh Guesthouse Craws Nest Hotel Crieff Hydro Hotel Crown Spa Hotel Da Vinci Hotel Days Hotel BW Plus Dean Court Hotel BW Derwant Manor Dolphin Holidays, Looe Dolphin Hotel Dolvean House Donnington Valley Hotel and Spa Duchally Country Estate Dunbobbin Hotels (Appleby Manor Hotel) The Egerton House Hotel Ellerthwaite Lodge English Lakes Hotels, Resorts and Venues Exeter Court Hotel Fairlawns Hotel & Spa Fal River Feathers Hotel Hotel Felix Flemings Hotel BW Forest and Vale Hotel BW Forest Hills Hotel Four Seasons Hotel Fox and Hounds Country Hotel Fox Valley Cottages, Looe BW Gables Hotel The Garrack Hotel and Restaurant George Hotel George Hotel George Hotel BW George Hotel Georgian House Gipsy Hill Country Hotel Gliffaes Hotel
London Edinburgh Wales Cornwall South Devon Wales Berkshire Torquay Dorset London Brighton Cheltenham Glasgow Scarborough Cornwall Cheltenham Cheshire Chester Southampton Cornwall Brighton & Hove East Sussex Bath Bridlington Worcestershire Devon Somerset Worcestershire Cornwall Bath Scotland Crieff, Scotland Scarborough Eastbourne Dorset York Northumberland Cornwall London Cornwall Newbury Perthshire Cumbria London Cumbria Cumbria Exeter Birmingham Cornwall Herefordshire Cambridge London North Yorkshire Cheshire London Devon Cornwall Bristol St Ives Norwich Swaffham Isle of Wight Staffordshire London Exeter Crickhowell, Wales
BW Gonville Hotel Grange Hotel Green Lawns Hotel & Restaurant GreenWood Forest Park Ltd, Y Felinheli Grim's Dyke Hotel Hall Green Greyhound Stadium Hambleton Hall Hotel Marriott Hanbury Manor Hotel and Country Club Harbour Hotels Hardwicke Hall Manor Hotel Hart Hambleton Plc Hayes Barton Guest House, Shanklin Hazelwood Park Headlam Hall Hotel, Spa and Golf H10 Hotels (Waterloo) Ltd Headland Hotel Headlands Hotel Heath Court Hotel Hendra Touring Caravan & Camping Park Higher Wiscombe Ltd Hope Street Hotel Horn of Plenty Hoxton Hudsons Guesthouse Inn at Lathones Isle of Eriska Hotel Keeston Hill Cottages Kesgrave Hall Hotel BW Kings Manor Hotel Kitley House Hotel Knights Hill Hotel Knockomie Hotel Landmark Langham Hotel Langstone Cliff Hotel Langstone Hotel Langtry Hotel The Lansdowne Club Lavenham Priory Ltd Lea Marston Hotel Leadstone Camping Lee Wood Hotel Linthwaite House Hotel Little Leaf Guest House, St Ives Little Orchard Village Llandudno Esplanade Hotel Ltd London Metropole Low Urpeth Farm Lucknam Park Hotel and Spa Lythe Hill Hotel Restaurant and Spa Marriott Meadowsweet Hotel Melia White House Hotel Mendip Inn Menzies Strathallan Hotel Le Meridien Piccadilly Metropole Hotel & Spa Middlethorpe Hall & Spa BW Monkbar Hotel Morningside Hotel Mount Royale Hotel Mullion Cove Hotel Myhotel Brighton BW Mytton Fold Hotel Nelson North West Hotels
Cambridge York Cornwall Gwynedd Middlesex Birmingham Peterborough Hertfordshire Dorset Co Durham Overton Isle of Wight Devon Darlington London Newquay Scarborough Suffolk Cornwall Devon Liverpool Devon London Brighton Scotland Oban, Scotland Pembrokeshire Suffolk Edinburgh Plymouth Norfolk Forres, Scotland London Eastbourne Devon Portsmouth Clacton-on-Sea London Suffolk Warwickshire Devon Buxton Cumbria Cornwall Cornwall Llandudno, Wales London County Durham Bath Surrey Portsmouth Llanrwst, Wales London Bath Birmingham London Wales York York Torquay York Cornwall Brighton Blackburn Chester
88
Hotel Noir BW North Shore Hotel Old Rectory at Broseley One Aldwych Hotel BW Orton Hall Hotel and Spa Osborne Hotel BW Palm Hotel Park Farm Estates Penrose Holiday Park Pig in a Poke Wines BW Premier Moor Hall Hotel Quayside Hotel Queens Hotel Queensbury Hotel Queensberry Hotel and Olive Tree Restaurant Queensferry Hotels Penrose Holiday Park Raincliffe Hotel Ramada Birmingham Rhos Country Cottages Rose and Crown Hotel Rosemoor Walwyn's Castle Roslin Beach Hotel Roundhouse Barn Holidays Royal Air Force Club Royal Garden Hotel Limited St Brides Spa Hotel Salcombe Harbour Hotel Savoy Savoy Park Hotel Scarborough Hill Country Inn Sea Breeze Shakespeare Hotel Shibden Mill Inn Solley Hotel Strawberry Fields Tamar Valley Donkey Park Tamar Donkey Sanctuary BW Tiverton Hotel Thorpeness Food Company (Dolphin Inn) Thurlestone Estates Ltd Torquay Leisure Hotels Ltd Tregenna Guest House, Falmouth Trevor Arms Hotel Tre-ysgawen Hall Hotel and Spa Torridon Varsity Hotel and Spa Weetwood Hall Ltd West Lodge Hotel White Swan Inn Whittlebury Hall Hotel and Spa Windmill Winnock Hotel Woodbrooke Quaker Study Centre Woodlands Country House Hotel Zetter Hotel and Townhouse House Hotel Crowne Plaza Docklands Hilden Lodge Guest House The Lowry Hotel (Rocco Forte) Vale of Glamorgan Hotel Limited Wroxham
North Yorkshire Lincolnshire Shropshire London Peterborough Torquay London Derbyshire Truro, Cornwall Maidenhead Sutton Coldfield Brixham Brighton Brighton Bath Edinburgh Cornwall Scarborough West Midlands Boduan, Wales County Durham Pembrokeshire Essex Cornwall London London Wales Salcombe London Ayrshire, Scotland Norfolk Brighton London West Yorkshire Edinburgh Brighton Devon Devon Devon Suffolk Devon Torquay Cornwall Wrexham Llangefni, Wales Scotland Huntingdon Road Leeds Hertfordshire Pickering Northamptonshire Scarborough Scotland Birmingham Somerset London London Cheltenham Salford Pontyclun Norwich
3Sixty Restaurants 60 Hope Street Ltd Amanzi Restaurant, Falmouth Bleeding Heart Restaurants Caf Spice Namaste and MR Todiwalas Kitchen Casa Romana Ltd Castle Beach Cafe, Falmouth Castle Cottage Restaurant with rooms CH&Co Civic Catering/Birmingham City Council Cross Ed's Easy Diner Emile's Restaurant French Connection Bistro Jacaranda Catering J S Restaurant Lambley Village Restaurants (North) Leon Restaurants Living Ventures Restaurant Mad Gatter Tea Rooms Maekong Thai Magpie Cafe Mandarin Restaurant Group Metropolitan Restaurants Neds Noodle Bar New Mill Restaurants Limited Orchid Group Oriental Porters English Restaurant and Covent Garden Grill Ransome's Dock Restaurant Readyforfood Shambles Italian Restaurant Sous Le Nez Ltd SSP UK Trading Places Village Restaurants (North) Woodwinds Holiday Complex Industry Support Businesses Bamboo Revenue Barrett Clark Blackpool Pleasure Beach Blue Sky Leisure BS Publishing Ltd Castlewood Enterprises Caterer & Hotelkeeper DP Associates HK Strategies Hospitality Media Ikhya Enterprises Ltd ITP Publishing Group Johnny's Tobacconist, Newquay Lowy Group Moshimo, Clear Conscience Eating Oswalds Limited RBC Publishing Ltd Site Great Britain University of Chester Venners W Shipsey & Sons Ltd
London Liverpool Cornwall London London Cumbria Cornwall Wales Reading Birmingham Kingussie, Scotland National London Stourbridge West Sussex Manchester Nottingham London Altrincham Gloucester Worcestershire Whitby Blackpool London London Hampshire St Albans Brighton London London Edinburgh London Leeds London Cheltenham Nottingham
London London Blackpool Norfolk Kent Folkestone, Kent National Milton Keynes London Penshurst, Kent Guildford London Cornwall London Brighton Cheshire Bournemouth London North-West Essex Wiltshire
Restaurants & Catering
89

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The Impact of Reduced VAT Rates on British Visitor Accommodation, Attractions and the Wider Economy: Report of Discussions

The importance of UK tourism

The impact of a VAT reduction the DPE model

The impact of a VAT reduction the CGE model

Comparing the DPE and CGE model results

Inter-American Development Bank website (http://www.iadb.org/en/topics/trade/frequently-askedquestions-faqs,1284.html)

Industry commitment to job creation and growth

Compliance with the Chancellors taxation principles

INTRODUCTION AND BACKGROUND

Tourism VAT in the EU

Figure 2: Rates of VAT on admissions to cultural attractions in selected EU countries

The Campaign for Reduced Tourism VAT

The Deloitte/Wason/Nevin report

Meetings with HM Treasury

Contributors to this report

Structure of this Document

The Importance of Tourism to the UK

Challenges faced by the tourism industry

Figure 4: Growth in number of visits by UK residents by region

World Economic Forum Travel and Tourism Competitiveness Report 2011

2006 Source: IPS

The decline in domestic tourism

Figure 6: Real average expenditure per domestic trip by UK residents

Visit Britain The UK Tourist 2010

170 165 160 155 150 145

Balance of payments millions -5,000 -10,000

25% 20% 15%

The Dynamic Partial Equilibrium Analysis

Pass-through of VAT cuts

The price elasticity of Tourism

The shadow economy

The effects of reducing UK VAT to 5%

The Computable General Equilibrium Analysis

Computable General Equilibrium Models

Results before adaptation of the CGE Model

Inter-American Development Bank website (http://www.iadb.org/en/topics/trade/frequently-askedquestions-faqs,1284.html)

Comparison of a cut in tourism VAT with other tax measures

Results with Additional Assumptions

Comparison of DPE and CGE Model Results

134.0 155.0 (479.0)

185.8 40.9 (439.4) 753.7 314.3

Reasons for model differences

The number of jobs created

3. Certainty and simplicity

4. Practicality and coherence

Growth and Economic Efficiency

Personal income tax

Corporate income taxes

HM Treasury (2010) Budget 2010 Annex A: Analysis by income distribution

Figure 15: Comparison of VAT rates levied on hotel accommodation

United Kingdom Portugal

Source: EC, as at 1st July 2012

Source: EC, as at 1st July 2012

Figure 1: Comparison of VAT rates levied on restaurants

30% 25% 20% 15% 10% 5%

Source: EC, as at 1st July 2012

Certainty and Simplicity

Practicality and Coherence

Travel agencies and other services Source: ONS

Discussions with HMT Officials in September 2012

The Route to Growth

A well-functioning tax system

Inter-American Development Bank website (http://www.iadb.org/en/topics/trade/frequently-askedquestions-faqs,1284.html)