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HOTREC Calls For Tourism Friendly VAT Policies Across Europe Following Study

HOTREC, the umbrella Association representing 43 national hospitality Associations in 30 countries across Europe, has published a report on the effects of lowering VAT on accommodation and restaurant services to the tourism industry.

Under current EU VAT policy, accommodation and restaurant services in EU Members States are eligible for a reduced VAT rate. As of 1 January 2017, 17 out of 28 EU countries apply a reduced VAT rate to restaurant services, and 25 out of 28 EU countries apply a reduced rate for accommodation services. The UK is only one of three countries that applies full VAT to both accommodation and restaurant services, making it one of the most expensive destinations for tourists.

The report looks at the ways in which lowering VAT rates has impacted the tourism industry in EU countries, finding benefits in five main areas: international competitiveness; employment; investment and the treasury; levelling the playing field; and lower prices.

Maintaining international competitiveness

Over the past 25 years the EU has been slowly losing market share in international tourist arrivals, from 53% in 1990 to 40.3% by 2015.

With VAT directly affecting the prices of tourism services, it is one of the key factors in global competitiveness. However, European VAT levels are often higher than in other destinations. For example, Malaysia and Thailand, the two most popular ASEAN countries, apply a 6% and 7% VAT rate respectively to hotel accommodation. Similarly China, which welcomed 56.9 million international tourists in 2015, apply a 6% VAT rate. These levels are significantly lower than the EU average of 11%, while the UK applies the full 20%.

HOTREC argue that continued application of low VAT rates is vital to Europe maintaining competitiveness in the global tourism market. In Ireland, reducing tourism VAT from 13.5% to 9% in 2011 has increased its attractiveness as a destination – a study by Fáilte Ireland found that in 2009, only 60% of tourists found Irish tourism products to be good value for money. By 2016, this figure had risen to 95%.

Employment

As a labour intensive industry, hospitality is one of the biggest drivers of job creation, accounting for 4.7% of total employment in the EU and is the UK’s third largest employer. The growth of jobs in this sector often outpaces the overall economy – in the last 10 years the number of jobs in hospitality increased by 29% compared to 7.1% in the overall economy.

The HOTREC report suggests that this outpacing can be linked to lowering tourism VAT. Sweden for example, having reduced its VAT on restaurant services from 25% to 12% in 2012, saw employment rise by 8% over the same year while other industries only saw a 1% increase. At the same time, total wages increased significantly in the restaurant sector – between 4% and 7.5% higher than other sectors. Prior to the VAT reduction, employment rates and wage growth were fairly similar across all industries.

Germany also experienced a similar outpacing, having reduced VAT from 19% to 7% in 2010 in the accommodation sector. By 2016, an additional 46,666 jobs had been created – an increase of 18.5% compared to 14.6% in the overall economy.

By increasing employment, the reduction of VAT appears also to contribute to social welfare savings by bringing people back into the job market. It is estimated that since VAT was lowered in Ireland in 2011, there has been a 34% increase in the number of new direct jobs created in accommodation and food services, and a saving of around €620 million in social welfare. Moreover, payroll taxes from the additional jobs contributed an extra €147.6 million to the exchequer.

A similar effect was seen in France in the two years following a VAT reduction for restaurants in 2009, whereby 52,700 new jobs were created, a new and compulsory health insurance system was negotiated, minimum wages were increased by 5.5%, and 2 additional days off and a €500 bonus was granted to restaurant employees.

Investment and treasury

In a highly globalised marketplace, products and services must be competitive on both price and performance. A high tax burden can discourage businesses from investing in quality, instead reducing their prices to increase competitiveness. A lower VAT rate therefore, can free up financial resources and encourage businesses to invest.

In 2009, hotels in Germany invested on average €90,000 on their businesses. By 2011, a year after VAT rates were reduced for accommodation services, average investment had risen to €243,000. The VAT reduction also benefited the treasury – by 2015 the total VAT revenue from the German hotel industry was more than €70 million higher compared to 2009, despite a drop in VAT rate from 19% to 7%.

The Irish Hotels Federation also estimates a 79% increase in investment activity following the VAT decrease in 2011, with annual VAT revenue now €202 million more than in 2011.

Levelling the playing field

With the growth of the sharing economy, the tourist accommodation market is more competitive than ever. It is estimated that there are already one and half times more holiday home beds in the EU than in hotels and similar regulated establishments. Sharing economy-style food services, such as private restaurants, are also on the rise.

With the majority of suppliers in the sharing economy not being subject to VAT, this creates a considerable disadvantage for traditional, regulated hospitality businesses. A lower rate of VAT would therefore reduce this competitive edge.

Lower prices

Finally, a lower VAT rate can often translate to lower prices for customers. A year after VAT was reduced in France for restaurant services, prices in the sector were lower by 0.92% on average, while the consumer price index for the overall economy rose by 1.51% – creating a price effect of 2.39% for customers. After two years, this effect further increased to 2.85% as prices in the overall economy rose faster than the restaurant sector.

Similarly in Finland, consumer prices dropped around 4.1% in the catering industry following a VAT reduction from 22% to 13%. The lower consumer prices translated to a 4.2% increase in demand for food services, leading to a €150 million growth in total sales and corresponding to around 2,100 additional jobs in the industry.

The report concludes that reducing VAT for tourism businesses has led to a multitude of interconnected benefits, including saving businesses, creating jobs, and boosting local and national economies. Following the VAT reduction for restaurant services in France, it is estimated that the number of bankruptcies in the sector decreased by 17%, saving 18,000 businesses and 30,000 jobs. Tourism friendly tax policies are therefore vital to maintaining Europe’s competitiveness as a destination in an increasingly competitive and global market.

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