VAT reduction for Northern Ireland tourism: is a one-size-fits-all VAT policy still appropriate?

22 March 2017

David Wilson

As the Prime Minister prepares to submit the Article 50 letter next week, the Institute for Government has suggested that the scrutiny of 15 Brexit bills will place ‘a huge burden’ on the United Kingdom Parliament. Meanwhile arguments continue over a referendum on Scotland’s independence. Against this turbulent background, the Parliamentary Northern Ireland Affairs Committee has suggested a reduction in tourism VAT in Northern Ireland, and the devolution and ultimate scrapping of Air Passenger Duty to boost the sector, but what about the consequential effect on other UK members? In a post-Brexit United Kingdom, is a one-size-fits-all VAT policy still appropriate?

After Brexit, the UK’s VAT regime will no longer be bound by EU law. VAT and other indirect taxes will therefore assume prominence in a post-Brexit analysis of what happens next. While the predominant discussions to date tend to have focused on issues such as extending zero-rates and reduced-rates, they’ve generally been directed at UK-wide proposals. 

As many tax commentators have noted however, post-Brexit there is an opportunity to apply regional, and indeed sector-based, VAT variations.

It therefore comes as little surprise that reducing VAT on tourism is back on the agenda. For a number of years now, businesses in the hospitality, leisure and tourism sectors have campaigned for lower VAT rates to stimulate growth and provide employment, pointing to Ireland where the introduction of the 9 per cent rate in 2011 has created an estimated 45,000 jobs.

The reality of cross-border competition that exists on the island of Ireland is seen by many as creating a compelling reason why, like corporation tax, Northern Ireland should be able to apply VAT on tourism at a competitive rate. Similarly, as the Scottish Government looks to reduce APD, the Northern Ireland Assembly may see this as putting it at a competitive disadvantage.

But where would that competition end? Assume for a moment that Scotland does remain in the United Kingdom, wouldn’t Scotland equally have an argument that it is in competition with Northern Ireland; as for that matter would Wales and the south coast of England – particularly as many MPs from both Conservative and Labour benches are acutely aware that their constituencies are in coastal towns dependent on tourism.

Whilst HM Treasury responses to reduced tourism VAT rates have historically focused on the economic impact, the constitutional impact may create an even bigger headache at a time when the government is already under pressure to deliver an increased number of Bills to support Brexit.

For more information please get in touch with David Wilson, Ian Carpenter or your usual RSM contact.