Would a tourist tax affect UK hotels?

04 December 2019

In our Hotels Forecast 2019-2020, we briefly noted growing talk of tourist taxes in the UK as a way for councils to increase local funding and generate new revenue. Here, we consider this issue in more detail, with a look at the ‘transient visitor levy’ tourist tax proposal in Scotland.

 

Arguments for and against a tourist tax


Currently, the UK is one of only nine countries in the EU that doesn’t allow cities to charge a tourist accommodation tax. Earlier this year, the Local Government Association recommended that local councils should be allowed to introduce a tourist tax to help them raise much-needed finances.

Those in favour of a tourist tax argue it:

  1. Helps to cover additional costs to local areas, such as policing and keeping streets and parks clean.
  2. Raises additional revenues for local services, local taxpayers and communities, and to enhance the tourist experience.

However, those against a tourist tax argue it:

  1. Might lead to fewer tourists and other short term visitors.
  2. Could reduce economic activity and revenues from other taxes.

The hotel industry has raised concerns about the impact it might have on the attractiveness and competitiveness of areas that introduce such a tax.

 

Impact of the tourist tax on hotels


While tourist taxes are intended to address the local impact of visitors, local governments have to be careful that they do not negatively affect accommodation providers.

Generally, the hospitality industry appears to oppose tourist taxes, arguing that the UK’s tourism industry is already one of the most highly taxed in the world.

According to the All-Party Parliamentary Group for Hospitality, tourist taxes must be "treated with caution". Its report calls for “greater examination of the potential impact of a tourist tax on consumers, businesses and the economy before taking any decisions on the principle of introducing one.” It suggests the introduction of another tax on the industry would require a significant cut in other rates for hotels, stating: “if VAT is cut to continental levels alongside the introduction of a tax, it is likely that this would mitigate industry opposition.” In European cities with tourist taxes, for example, VAT rates are significantly lower than the 20% in the UK - Italy and France is 10%, Germany 7% and the Netherlands 6%.

 

Scotland’s transient visitor levy


Significant growth in visitors to specific parts of Scotland has led to greater pressures on the local environment and on activities that maintain and enhance the tourist experience.

The last Scottish budget proposed to give local councils the power to impose a discretionary 'transient visitor levy'; the Scottish Government is now consulting on the principles of the levy. Edinburgh Council has put forward specific proposals suggesting a charge of either 2% or £2 per room per night. This would be chargeable all year round on all forms of accommodation, capped at seven nights. This charge would only take effect if legislation is passed in the Scottish Parliament.

There was strong public support for the proposal, but also significant push back from the tourist industry and hotels in particular. Concerns include the possible impact on tourist numbers, overnight visitors being replaced by day visitors who often spend less, and whether the levy can be fully enforced on Airbnb accommodation and its equivalents.

 

What’s next for the tourist tax?


If the tourist tax takes off across the UK, the hotels sector is likely to seek a reduction in its overall tax burden, including arguing that a cut to VAT is needed to help mitigate the impact on the industry.

While a levy similar to Edinburgh’s proposal brings little revenue at a national level, it can raise significant finance for local councils. The key question is whether it dissuades people from overnight stays and becomes detrimental for the hotel industry and the wider local economy. We will watch the developments in Scotland with interest, particularly as other regions across the UK (including Liverpool, Bath, Aberdeen, and the Scottish Highlands) also monitor the situation.

For more industry-leading insight, an assessment of UK hotels performance this year, and a look ahead to 2020, read our Hotels Forecast 2020: Turn disruption into opportunity.

 

Sharon  Blain

Sharon Blain | Senior Tax Manager, PwC United Kingdom
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