Could a Reduced VAT Rate for Tourism Boost Business?

3 April 2014, 12:00

Most businesses would probably be happy to pay no VAT at all, but of course it is part of being in business and earning a significant sum each year. Smaller businesses tend to suffer more when times are tough, mainly because there are fewer things they can do to increase their bottom line.

However, a potential change in VAT would be a massive change if it ever did go ahead. Consider the current situation, where businesses in the tourism industry pay 20% as a standard rate of VAT. The fixed rate scheme can result in paying less VAT but it depends on where your business would fall into it. Hotels and accommodation can elect to pay a flat rate of 10.5% but different businesses would get different flat rates.

The councillor who has suggested the move, Independent councillor Claire Wright, has suggested a much lower rate of 5% would boost businesses in the tourism industry and lead to a more positive outlook.

It is doubtful as to whether this would ever happen, but it certainly attracts attention for the many business owners in Devon who have been battered by the weather and by tough financial times recently. The idea is clearly that a reduction in the rate of VAT paid by tourism related businesses would give the Devon economy a real boost. This would have other knock on effects, all of which are likely to be positive. As businesses grow and become busier and more successful, there is more need to take on additional staff to cope with it. This will help the economy in another way, as well as helping individual businesses.

It remains to be seen whether the debate will end up going to government or whether it will stall before that stage. According to research, most other European countries have a reduced rate and the UK is one of the few – four in fact, soon to be three – that doesn’t. This is quite a sobering fact, especially when you consider that tourism is one of the most important business sectors in the country. It has the potential to encourage home grown holidays as well as inviting people from all over the world to come and visit our country. The more you understand about tourism and its value to local communities and the country as a whole, the more it makes sense to reduce VAT.

If the government did decide to reduce VAT to just 5% for these businesses, it would be fascinating to see what changes the reduction would bring. Some believe it would bring additional profits and more jobs, and in the end the government and the community as a whole would benefit from that. As you can see, a reduction in VAT could be a good thing in several different ways.