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Why lowering VAT to help tourism is just a delusion

Analysis

By John Simpson

The tourist season is starting. Easter weekend is the 'fully-open' signal to the providers of facilities for incoming visitors. Holiday-makers, business and family visitors, and conference delegates put increased demand on accommodation, travel services and visitor amenities.

In Northern Ireland, the established policy priority is that a larger tourist sector should contribute to making the local economy stronger through the provision of tourist services and amenities. The visitors receive good value for money and contribute to the income of the providers.

Visitors are welcome but not simply at a cost to the 'home team'.

A clear statement about the value (in monetary and in other terms) of visitor promotion is needed to underpin arguments about the balance of advantage in offering incentives and other support to maximise the number of visitors and maximise their spending. This is more than simply counting the number of visitors.

Similarly, an evaluation is needed of the merits of public sector spending to enhance visitor amenities. How far should a local authority or central government go in providing access to these amenities whether free of charge or subsidised? There will be many amenities shared between local residents and visitors which will be free but, indirectly, add to the enjoyment or value from tourism.

If there is a bias, facilities are often enhanced because that would attract more visitors but without taking explicit account of the costs.

Questions about costs and benefits are likely to be asked when a multi-million pound project is in contemplation but, logically, this should also apply to smaller ideas. In the public sector the easy logic in the provision of amenities that would be enjoyed by visitors is that satisfying visitors is itself a worthwhile objective.

Visitor enjoyment free, or subsidised, based on public sector investment spending without consideration of visitor payment, would be perverse. Visitors, including tourists, are welcome not simply because we are ready to subsidise their enjoyment.

Visitors are welcome because they contribute to local incomes by buying (or paying for) local services and facilities; not if visitors impose a 'cost' on local services or the local budget. The distinction is important and should be carried into public debate and decision making about tourism development policy.

The distinction is critical to an assessment of the merits of incentivising different types of accommodation providers, ranging from five-star hotels to bed and breakfasts. Government agencies now have a policy that proposals for new hotels in parts of Northern Ireland where private sector providers can be expected to compete commercially and earn a return on their capital do not merit investment grants or subsidies. Those principles also extend to taxation policies, whether direct taxes such as corporation tax or indirect taxes such as VAT.

If the attractions for the visitor, whatever the purpose of the visit, are strong enough, then the visitor should be expected to pay at least the same taxation as local residents and users.

Tourists are income generators, not subsidised guests.

This means that the argument for lower VAT rates for visitor accommodation is weak. This becomes a form of subsidy to the visitor. Do we really think that a lower tourism VAT would increase the number of tourists so much that the net VAT revenue would not be reduced?

The counter-argument on VAT applied to tourism is that the assessment in the Republic of Ireland is that a lower differentiated VAT rate has taken some of Northern Ireland's potential tourist income to 'south' of the border. That is possible but probably marginal.

In a counter-perception, would there be greater merit in encouraging a quality tourism product which made a VAT difference of only minimal consequence.

For Northern Ireland, the policy for attracting more visitors should be on the quality of the offer - well worth paying for - rather than marginal and possibly delusory fiscal adjustments.

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