In the 41 years since VAT was introduced, it has gone from gone from raising £1.5bn per annum to over £100bn. In 1973, upon its introduction, it was set at 10% and now stands at double that.

As the name suggests, the idea of VAT (Value Added Tax) is to tax the value businesses add to goods and services. This is achieved by allowing businesses to claim back the VAT the incur on buying the goods and services they use to create their own goods and services. They then charge VAT on their sales (which will presumably be higher than what they paid for them) and, hey presto – the government takes the tax on the gross margin.

 

In theory this is simple. As anyone who deals with VAT will know, in reality this is rarely the case.

Over four decades VAT has become a minefield of complex legislation, infinite exceptions and mindbending nuances. Food is notoriously complex (remember the pasty tax?). But then again just about every area of VAT, once you dig deep enough, seems to just get bogged down in red tape.

However, for all the additions and amendments to legislation over the years, it appears that not all holes have been plugged.

The key issue in VAT today that has yet to be addressed satisfactorily is the issue of having a reduced rate of VAT for the hospitality and tourism sector. It is an issue which has been pursued somewhat in parliament, by NI MP’s too. Although to date, there seems to have been a certain amount of resistance to the idea. For my part, here’s why I think we need to consider a reduction in VAT for this sector.

1. Greater than normal disparity between Input VAT (VAT Reclaimed) and Output VAT (VAT Paid).

This sector has, for many years been plagued by a “blind spot” of VAT. This sector relies on two key elements – food and staff. Food, when purchased raw, is (generally) zero rated. Once prepared, heated and/or eaten on site, it is standard rated. The result? Restaurants, cafes, bars and hotels are paying over 20% of their sales in VAT whilst having little or no VAT to claim back on their purchases.

This seems like it should be an easy problem to solve – why don’t these businesses increase prices to cover their own margin and the VAT? Simply put, there is very little market tolerance for increased prices. Would you pay £3 for a latte when the one down the road is £2.50? Probably not.

Similarly, because these industries are also heavily dependant on and driven by people, one of the biggest costs to these businesses is wages. In certain tourism businesses, the only expense is wages. These businesses are therefore being hit with an effective VAT rate of 16-19% whilst most other businesses fall somewhere between 10-14%.

This disparity effectively means that outside of the cost of sale, VAT becomes the biggest expense and the quickest cash drain.

2. Northern Ireland is at a greater disadvantage than most

A number of years ago, the Revenue Commissioners in the Republic saw the potential for this reduced rate of VAT in helping to grow both the sector and the economy. The South currently charges 9% VAT on supplies of hospitality and tourism. As such, these businesses in the south can offer better value for customers. Given that Northern Ireland has a land border with the Republic, the difference is being felt in the North.

And that difference can equate to thousands of pounds. When this reduced rate was introduced, I recall reading a tweet from a disgruntled restaurant owner who said that if his establishment had have been 10 miles down the road his VAT bill for the quarter would have been around £14,000 less.

David Gauke, the Financial Secretary to the Treasury has been made aware of the issues of this sector and the VAT strain that is being felt. I put my thoughts in an email to Margaret Ritchie MP who passed them on and I am aware that Newry Chamber of Commerce have also been in contact on the same issue. The short response I received was that this reduced rate could not be done on a regional basis (as EU law would prohibit that) therefore it would have to be done an a UK wide basis.

4. Boost the economy

Cutting taxes is always going to be welcome by the public. But in reality what is the cost to the economy? In David Gaukes response, he outlined that the reduction in the tax take for government would be around £9-11bn. This is certainly significant but I think it is somewhat short sighted to equate cutting a tax to a lower tax take. Cutting the rate of VAT for the hospitality and tourism sector would, I believe, lead to economic growth.

From a consumer point of view these goods and services would now become cheaper. The knock on effect of cutting prices for consumers, as we know, is that their consumption increases. Hotels, meals outs, coffees, tours and days out for the family all reduce in price if the cut were to go ahead. If the UK increases its tourist numbers as a result of this VAT cut, that brings with it huge additional spending by said tourists.

From a business point of view, let’s go back to our restaurant owner who could have saved £14,000 with a reduced rate of VAT. How else would he have spent that money? He would have reinvested in his business, hired more staff, expanded operations. Whatever way you look at it, he would have spent it elsewhere. That’s economic growth. Money going to the Treasury goes to paying government debt to bring about a short term deficit reduction so that, when you all line up to the polls next May to vote, the current government has something to crow about.

To my mind the governments remit is not to take in as much money in taxes as it can, but to assist us in making our micro and macro economies more prosperous. This reduction in VAT would help in driving those economies forward.

5. Everyone else is doing it

Well nearly everyone. All but four EU member states have introduced reduced VAT rates for accomodation and 13 have reduced rates for hospitality. This in itselfs is validation that these sectors a) are vital to driving economic growth, and b) suffer from a greater tax burnder than most other sectors. I don’t believe we should just jump on the band-wagon in applying a cutin VAT. But at least look at these other countries and use them as a case study to make an informed decision on how a cut could play out in real terms. How did these economies change when the cut came in?

Conclusion

This is not a new idea. As above, many other countries have done it and the government have been lobbied from all side in regards to trying to enact this change. Unfortunately there seems to be significant resistance to the idea. Perhaps this is down to it being an election year and they believe there are better “vote-winners” to chase. Perhaps they truly feel it would be a bad idea. But I would still like some dialogue on this.

This is an issue that is closing businesses down. The VAT liability arising from a good trading quarter can easily obliterate a business. Margins are too tight to raise prices, wages are unavoidable and suppliers are only marginally cheaper than each other. There is nowhere else to make savings. Cutting taxes to boost economic growth might seem counter intuitive, but businesses closing their doors, laying off their staff and going bust leaving their current VAT bill unpaid certainly won’t grow the economy.

 

The case for a Reduced Rate of VAT for Hospitality & Tourism