VAT on tourism

The campaign for VAT relief to support tourism

There has been a long-running campaign by the tourism industry for the UK to introduce a rate on VAT below the standard rate of 20% on services supplied to tourists. Proponents have argued that this would allow hotels, restaurants, pubs and visitor attractions to cut prices, boosting sales and employment in this sector, which in turn would generate growth in the wider economy.

The importance of EU VAT law prior to Brexit

European VAT law limits the discretion of any Member State to set lower VAT rates on individual goods and services. There is dispensation for a lower rate on certain supplies associated with tourism: specifically, hotel accommodation, certain restaurant services, and some types of admission charge, including charges for entry to amusement parks. Several Member States have made use of this dispensation to charge lower rates of VAT – between 5% & 15% – on these supplies, including Ireland, which introduced a 9% rate in July 2011.

In the past both Labour and Coalition Governments took the position that a reduced rate would not be well-targeted nor cost-effective. With the UK having left the EU, EU VAT law no longer represents an obstacle to future VAT reform.

A temporary reduced rate as part of the Government’s response to Covid-19

In July 2020 the Chancellor, Rishi Sunak, announced a series of initiatives to boost job creation in the context of the Covid-19 pandemic, including a temporary 5% VAT rate on most tourist and hospitality-related activities. Initially it was anticipated that the 5% rate would apply to supplies made between 15 July 2020 and 12 January 2021. Subsequently the Government retained VAT relief for this sector for a further fourteen months – extending the 5% rate up to 30 September 2021, and then replacing it with a 12.5% rate until 31 March 2022.

The Government has ruled out making the reduced rate of VAT permanent on the grounds that the reduced rate was designed to support sectors of the economy severely affected by Covid-19.

In answer to a recent written answer the Financial Secretary to the Treasury, Lucy Frazer, stated “it is appropriate that as restrictions are lifted and demand for goods and services in these sectors increases, the temporary tax reliefs are first reduced, and then removed, in order to rebuild and strengthen the public finances” (PQ 153880, 26 April 2022). In a second written answer the Minister noted that requests for changes to the coverage of VAT “should be viewed in the context of over £50 billion of requests for relief from VAT received since the EU referendum. Such costs would have to be balanced by increased taxes elsewhere, increased borrowing, or reductions in Government spending” (PQ157518, 27 April 2022).