VAT: TO CUT, OR NOT TO CUT, that is the question...
Will the Government grasp the nettle and cut VAT across the hospitality industry?
Peter Burgess, managing director of Retail Human Resources plc discusses the benefits of such action for businesses, the industry and the wider UK economy.
That is indeed the question vexing politicians of all parties. The ConDem coalition argues that with the deficit still growing year on year it would be reckless to cut this tax now. They do have a point. What is probably not appreciated is that the so-called austerity measures are not cutting the deficit. Government borrowing is still growing year on year. All they are doing is cutting the rate at which the deficit is growing.
And that is only part of it. The Government is also nervous about what the credit rating agencies say. If the UK loses its AAA rating it is not just egos that will be hurt. It will mean that the cost of our debt mountain will rise even further. So, on the face of it, the Government is right and we should all just get on with it.
However, the counterargument is that by starving the economy of cash, we are causing even more damage because the best way to pay off the debt is for the economy to grow. If the economy grows then the Government gets more in tax and that is the best way to pay off the debt. This too is a legitimate argument. The UK economy will be lucky to grow at all in 2012. No one doubts that this is largely because our most important export market has gone stark raving mad and that UK companies are scared to expand until this situation improves.
The fact is, the argument as to whether the Government should stimulate the economy by borrowing more or whether we should grin and bear the austerity is very finely balanced and only history will decide who is right.
What is disappointing, however, is the lack of creativity in the argument. Labour says cut VAT by 2.5% and the Government says don't.
Such a cut would cost the Government coffers around £13 billion. I was astonished when, in 2009, the Government believed that a 2.5% cut in VAT would stimulate spending in the shops. Did they really think that a 2.5% discount would encourage shoppers when the retailers were struggling to shift stock discounted by 50%? Of course it did put £13 billion back into the economy and that was helpful. However, much of this sum was used to pay off debts as nervous consumers thought that the world as we know it was coming to an end. It therefore did not have the impact desired or warrant the huge rise in debt. The same is true today.
Nevertheless, there are things that could be done.
Rather than cut the VAT rate by a small amount across the board, the Government should cut VAT where it will mostly boost the UK economy and not suck in imports from abroad.
I would like to see the VAT on hotel rooms cut to zero for a year and then return to only around 7%, the European average. The boost then is entirely to the UK economy. Imagine if you are choosing between Eurodisney or Center Parcs and suddenly you get a 20% discount on Center Parcs? That may well persuade you to stay in the UK. Conversely, 2.5% off your pair of shoes will not encourage you to buy another pair. And if it does, they will almost certainly have been imported.
A stage further would be to cut the VAT rate at restaurants. The hospitality industry is the second largest employer, after retail, in the UK and this sort of boost will create thousands of jobs, thus removing billions from the welfare bill. Brains better than mine will have to work out how much of the cost will be recovered, but it must be substantial. Not to mention the increased profits of the hotel and restaurant companies, mostly registered in the UK, which will generate increased taxes. It is entirely conceivable that such a move will not only be self-financing but may actually generate extra revenue for the treasury.
The BHA has been campaigning for this for some time, leading a coalition of its own with the British Association of Leisure Parks, Piers & Attractions, the Federation of Small Business and the Tourism Alliance.
The trouble is that all governments want to do is tinker. A tiny cut in the VAT rate won't make a difference. A full 20% discount on hotel and other accommodation would be a major boost; and right across the country. Not only would we Brits be more inclined to spend our money at home, but international tourism, one of our most important earners of foreign currency, would receive an enormous boost.
The UK is the fourth most visited country in the world. The biggest negative to foreign tourists is the high cost of accommodation. A 20% reduction will certainly attract more tourists and this should be tied in with a tourist campaign -- always assuming the tourist can get through Theresa May's immigration queues.
A major cut in hospitality VAT rates is unarguably justified in the current climate. I would argue a permanent cut is always justified if we wish to keep one of our most important industries competitive. If you agree, write to your local MP at the House of Commons SW1 and make the suggestion.