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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.

European VAT law limits the discretion of any Member State to set lower VAT rates on individual goods and services. That said, 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 make 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.[1]

There have been concerns that the tourist industry in Northern Ireland was particularly affected by the use of a lower 9% VAT rate in Ireland which has applied to a number of tourism related goods and services.[2]  In the Autumn 2017 Budget the Government announced that it would “publish a call for evidence which will consider the impact of VAT and air passenger duty (APD) on tourism in Northern Ireland, to report at Budget 2018.”[3] This consultation opened on 13 March and closed on 5 June. The consultation paper noted that responses would “inform future policy development but the government has made no firm decisions about the issues set out in this document.”[4]  The Government’s response was published as part of the 2018 Budget on 29 October. In this the Government stated that there would be “no changes to the VAT or APD regimes in Northern Ireland at this time” and that the Government would “continue to explore ways to support a successful and growing tourism industry.”[5]

The relevance of the EU-wide rules on VAT rates has receded, with the UK’s departure from the EU on 31 January 2020.[6] The UK was required to remain compliant with EU law, including VAT law, during the ‘transition period’ – the period set for the negotiation of a new UK-EU relationship.[7]  On 24 December 2020 the UK and EU announced the conclusion of the Trade and Cooperation Agreement (TCA), to be implemented in time for the end of the transition period on 31 December 2020.[8] The TCA sets out provisions to maintain a level planning field between the UK and the EU for open and fair competition and sustainable development, and this includes commitments to uphold global standards on tax transparency and fighting tax avoidance,[9] but as the Government has underlined “there are no provisions constraining our domestic tax regime or tax rates.”[10]

In his 2020 Budget on 11 March the Chancellor, Rishi Sunak, announced a series of initiatives to support businesses affected by the Covid-19 pandemic, including business rates relief for hospitality and leisure businesses.[11] At the time the Chancellor did not mention the VAT treatment of services supplied to tourists, but on 8 July 2020 he announced a series of measures to boost job creation, including a temporary 5% VAT rate on most tourist and hospitality-related activities.[12] The 5% rate would apply to supplies made between 15 July 2020 and 12 January 2021.[13]

This VAT relief has been extended twice since then. First, on 24 September Mr Sunak set out a second series of measures to support the economy, and as part of this confirmed that the temporary 5% rate would be extended to 31 March 2021.[14] Second, in his 2021 Budget on 3 March Mr Sunak announced that the 5% rate would be extended to 30 September 2020, and then replaced with a 12.5% rate, to remain in effect until 31 March 2022.[15] Detailed guidance on the scope of the reduced rate has been published by HMRC.[16]

It is estimated that this VAT relief will cost £2.5 billion in 2020/21,[17] and £4.7 billion in 2021/22.[18] Statutory provision for the 5% rate to apply up to 31 March was made by secondary legislation (SI 2020/728 & SI 2020/1413). Provision for the extension of this temporary reduced rate was included in the Finance Act 2021 (specifically sections 92-93).[19] Subsequently the Government has ruled out making the reduced rate of VAT permanent.[20]


[1]   For example, see, HC Deb 1 December 2009 c605W; and, HC Deb 17 March 2015 cc238-241WH

[2]   For example, see, Northern Ireland Affairs Committee, Promoting the tourism industry in Northern Ireland through the tax system, HC 50 of 2016-17, 20 March 2018. The Irish Government raised the VAT rate on tourism services back to 13.5% from 1 January 2019 (HM Treasury, VAT, Air Passenger Duty and tourism in Northern Ireland : summary of responses, October 2018 p2).

[3]   Autumn Budget 2017, HC 587, November 2017 para 4.89

[4]   HMT, VAT, Air Passenger Duty and tourism in Northern Ireland: call for evidence, March 2018 para 1.8. see also, PQ136109, 23 April 2018.

[5]   Budget 2018, HC 1629, October 2018 para 4.113

[6] For a narrative of events leading up to the UK’s exit see, Brexit timeline: events leading to the UK’s exit from the European Union, Commons Briefing paper CBP7960, 6 January 2021.

[7]   Letter from the Financial Secretary to the European Scrutiny Committee, “EU legislative proposals on VAT”, 5 December 2018

[8]   For details see, The UK-EU Trade and Cooperation Agreement: summary and implementation, CBP9106, 30 December 2020.

[9] specifically, Articles 5.1-3 of Title XI to Part Two of the Agreement. See also, European Commission, Questions & Answers: EU-UK Trade and Cooperation Agreement, 24 December 2020 (“How will you ensure that taxation isn’t used as a means to distort competition?”).

[10] 10 Downing Street, UK-EU Trade and Cooperation Agreement: summary, December 2020 para 90

[11] For details see, Coronavirus: support for business, CBP8847, 15 January 2021 (see section 10)

[12] HC Deb 8 July 2020 c977; see also, HM Treasury, A Plan for Jobs, CP261, July 2020 para 2.22-32

[13] For details see, Guidance on the temporary reduced rate of VAT : HMRC Brief 10(2020), 9 July 2020.

[14] HM Treasury press notice, Chancellor outlines Winter Economy Plan, 24 September 2020. See also, HM Treasury, Winter Economic Plan, CP297, September 2020 para 2.7.

[15] Budget 2021, HC 1226, March 2021 para 2.46

[16] HMRC, VAT: reduced rate for hospitality, holiday accommodation and attractions, updated 3 March 2021 & Temporary reduced rate of VAT : HMRC Brief 2(2021), 3 March 2021.

[17] OBR, Economic & Fiscal Outlook, CP318, November 2020 p177, para A.12.

[18] Budget 2021, HC 1226, March 2021 p41 (Table 4.1 – item 5)

[19] For details see, HMRC, Introduction of a new reduced rate of VAT for hospitality, holiday accommodation and attractions, 3 March 2021

[20] PQ HL1851, 19 July 2021

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