Will the LibDems' new VAT policy further the cause of the tourism lobby?

23 September 2015

Ian Carpenter

The Liberal Democrats this week voted in favour of reducing VAT on tourist accommodation and attractions in stark contrast to the position taken by the Conservative/LibDem coalition government. The motion in favour of a reduction from 20 per cent to 5 per cent argued that similar initiatives in other EU countries had increased jobs and stimulated economic activity. So if the case is so compelling, why hasn’t the UK followed suit?

Funny things happen to political parties when they move from government to opposition. 

The Liberal Democrats’ decision to approve a motion at its party conference this week in favour of a cut in the rate of VAT on domestic tourism from 20 per cent to 5 per cent is a case in point.

In response to lobbying from the industry, the Conservative/LibDem coalition government had always been clear that it had no plans to cut VAT for the sector. During a Westminster Hall debate in February 2014, the then Exchequer secretary said that 'The conclusion the Government has reached is that a VAT cut would not produce sufficient economic growth to outweigh the revenue shortfall. A VAT cut for this sector would therefore need to be funded either by additional borrowing or by raising other taxes, both of which are likely to have a negative effect on the economy' - a position maintained throughout the last Parliament.

Yet, just months after leaving the coalition government, the LibDems have voted in favour of a VAT reduction, citing reports commissioned by the tourism lobby that the move would create 123,000 jobs and £4bn of extra revenues over 10 years. 

On the face of it, these two positions appear to be very much at odds. 

In its written motion, the Liberal Democrats argued that the UK should join other EU member states that had taken advantage of the dispensation for a lower VAT rate on tourism supplies. It noted that similar measures introduced in France and Ireland had led to the creation of new jobs and stimulated economic activity.

But if the evidence from other EU states is so compelling, why has the UK not introduced this policy before?

Part of the difficulty is in trying to compare the economic impact of different tax regimes in different EU countries. For example, other countries charge a room tax, and apply VAT to public transport – the UK doesn’t. The UK has one of the highest VAT thresholds in the EU (which currently stands at £82,000) below which no VAT is payable. Employers’ social security contributions, minimum wage obligations and available tax reliefs all differ significantly throughout the EU. 

Developing a meaningful comparison is therefore fraught with difficulties and the Government has indicated that it has yet to find any evidence of a causal link between VAT rates and tourism activity.

Writing in advance of the LibDem conference, economic analyst and LibDem member Adam Corlett wrote 'My opposition to this motion is part of a more general worry, that the party and its conference will slide into the path of easy opposition, forever promising lower taxes and free ponies for all.'

One thing’s for sure – taking decisions in opposition is far easier than in government.