VAT is a funny old thing if you’re not used to paying it from a business point of view. The threshold for compulsory enrolment is currently £81,000. However if you only just go over the threshold in terms of income, you actually lose money. This is because you have to start paying VAT to the government. According to reports you would actually have to grow your income to about £110,000 a year to be better off for paying the VAT in the first place.
Since this is not a realistic proposition for many Welsh tourist businesses, they have decided they have no choice than to close during the quieter winter months, when they see less tourism anyway. This means they stay just under the VAT threshold and don’t have to worry about losing money because they have just crept over that threshold and now have VAT to pay alongside their other bills.
When you think about it, it does make a lot of sense. Not all businesses close of course, but there is quite a trend of it happening in Wales. The Conservative MP for Aberconwy pointed out the problems and labelled the so-called VAT trap as a reason for this. It is not that much of a stretch to assume that other tourist businesses elsewhere in the UK might be experiencing the same kind of problems as well.
In a similar vein, a Give Us a Break campaign to cut VAT for tourist-related businesses was launched at the end of June this year to help support this cause. The idea is that VAT for businesses of this type should be reduced to 5% instead of staying at the current 20%. It is the rate of VAT payable by businesses that creates the VAT trap that exists as soon as a business tips over the £81,000 threshold. Trying to earn an additional £30,000 a year when you have just reached the £81,000 a year threshold can be quite a task. And yet if you don’t do this you are actually worse off if you start paying the required amount of VAT until you hit that new level.
It remains to be seen whether or not people manage to convince the government that change is in order in this area. Certainly there is plenty of evidence that the tourist industries in other European countries pay a lot less VAT than we do in the UK. According to figures, French tourism businesses pay 10% in VAT, and the same figure is true of Spanish tourism businesses. The figure can be even lower elsewhere.
When you look at those figures it certainly does seem disappointing that Welsh businesses are closing during the winter months to save money. It seems that staying open and triggering that 20% VAT level is just too expensive for them to manage.