The City of Edinburgh Council's consultation on a Transient Visitor Levy (TVL) or ‘tourist tax’ closes next week, but one big unknown remains – what happens about VAT?
The TVL is expected to raise £11m to fund local services and tourism investment. Broadly, businesses approve with 69 per cent expressing support according to a survey from the Edinburgh Chamber of Commerce.
The Council proposes that the TVL be a fixed 2 per cent or £2 per room levy, per night.
Setting aside the need for the Scottish Government to legislate to enable the Council to introduce such a levy, due consideration also needs to be given to the VAT implications. Will the TVL be subject to VAT and if it is, who will collect it?
VAT is normally applied to the entire consideration received for a supply of goods or services - including any levies. Such a ‘tax on tax’ already applies in other areas such as SDLT/LBTT which is calculated on the VAT-inclusive price of a property transaction.
The legislation will therefore determine whether it is a levy on the accommodation providers or the visitors themselves, and how the TVL will interact with other taxes, including VAT.
If the TVL is actually a ‘tax’ on the accommodation providers then the £2 per room, per night is further payment by the visitor for the supply of accommodation. The TVL will then be subject to VAT at the standard-rate (currently 20 per cent) – so the £2 could become £2.40 for the visitor with £2 going to the Council and 40p to the UK Treasury.
An alternative is that the TVL is a ‘tax’ levied by the Council on the visitors directly, whereby the accommodation providers merely act as ‘agents’, disbursing it on the bill for the accommodation, after VAT has been calculated on the bill for the accommodation. If this is the case, the TVL is likely to be free of VAT, but this will still leave the accommodation providers with the problem of administering the TVL collection.
Conversely, it may also be possible that payment of the TVL to the Council by either or both the accommodation provider or the visitor could be deemed to be subject to VAT in the hands of the City of Edinburgh Council. This could then mean that the Council needs to pay 20 per cent VAT to HMRC from the £2 per room, per night it receives. This would reduce its anticipated gain of £11m income by £1.83m to £9.16m, with the £1.83m swelling the UK Treasury’s coffers.
It will be interesting to see how the proposed TVL could be legislated for. As Police Scotland found to their cost, VAT needs careful upfront consideration.