Introduction

The Northern Ireland Tax Committee of Chartered Accountants Ireland is pleased to have the opportunity to comment on the above call for evidence launched on 13 March 2018.

We would be happy to discuss any aspect of our comments herein and to take part in any further consultations/initiatives in this area that there may be in the future. We wish to comment on some specific aspects of this call for evidence. We are aware that various trade bodies and associations etc. will be responding to the call for evidence with detailed sectoral impact analyses and evidence. In that context, as we are an all island body, our comments are mainly framed around the Irish experience of a reduced rate of VAT for the tourism sector.

Varying the VAT rate for Northern Ireland

There can be no doubting the contribution that the tourism industry makes to the Northern Ireland economy. According to recent statistics10, tourism is responsible for in excess of 5.2% of GDP in Northern Ireland and supports 61,300 jobs. However, this statistic does not take into account the tertiary and related sectors which also contribute to the Northern Ireland economy and which also benefit indirectly from tourism.

The unique geographical positioning of Northern Ireland is recognised in the consultation. As the only part of the UK which shares a land border with another EU country which has a reduced rate of VAT on tourism, it is important to consider if a similarly reduced rate would benefit tourism in Northern Ireland enabling Northern Ireland to compete on a level playing field with its economic neighbour – the Republic of Ireland. In addition, 16 out of 19 Eurozone countries have tourism Vat rates of 10% or less – compared to these countries, Northern Ireland is not currently in a competitive position.

Tourism Ireland, as set out in the consultation document, promotes tourism for the island of Ireland. It makes no sense that its remit covers the whole of Ireland, yet the two VAT rates on tourism in each jurisdiction are not directly comparable because consumers cannot draw direct comparisons between price differentials in the two regions as prices are published inclusive of VAT.

Therefore we believe that, based on historical experience in the Republic of Ireland, a reduction in the VAT rate in Northern Ireland for tourism would be a significant stimulating factor. In the longer term these measures would create greater wealth for Northern Ireland thereby resulting in a smaller subvention from HM Treasury.

The Irish experience

As an all-island body, Chartered Accountants Ireland has direct first-hand experience of the impact of a reduced rate of VAT in stimulating tourism in the Republic of Ireland. The Irish Department of Finance stressed the importance of the 9% VAT rate in its July 2017 publication Selected VAT issues11. This was followed by the decision in Ireland’s most recent Budget12 in October 2017, to retain the lower 9% VAT rate for tourism with the Minister for Finance citing tourism as “a national success story”.

The lower rate of VAT in Ireland was first introduced in July 2011 and has been in operation for almost seven years. As an economically aligned tax policy, the Irish Government continues to maintain the 9% VAT rate on tourism and what was initially introduced as a temporary measure has now become an extremely important policy for the Irish tourism sector particularly since the EU referendum in June 2016 led to a weakness in sterling and threatened visitor numbers to Ireland. This delivers a very clear message about the importance of the 9% rate.

According to the Irish Tourism Industry Federation13, the introduction of the 9% VAT rate in 2011 has, based on statistics from the Central Statistics Office & Fáilte Ireland, helped the tourism sector in Ireland to create an additional 57,000 jobs nationwide as a result of the lower rate.

Research14 conducted on behalf of the Drinks Industry Group of Ireland also found that the total multiplier effect of a job in the accommodation and food services sector is 0.46. This suggests that for every direct job in the sector a further 0.46 of an indirect job is supported by the sector.

Fáilte Ireland15 also estimates that for every €1 of tourist expenditure, 23 cents is generated in tax revenue for the Irish Exchequer. This means that since the introduction of the 9% rate, the value of direct tourism related receipts to the Exchequer has increased from €1.265 billion to £1.911 billion in 2016, an additional €646 million.

Not only has Ireland’s tourism success been notable in terms of visitor numbers, revenue and employment, after many years of inactivity, many elements of the tourism sector are once again seeing increasing levels of construction and new development taking place. Throughout Ireland, local authorities currently have plans for over 120 new tourism projects at an envisaged capital cost of €180.8m, while in Dublin it is estimated that there are approximately 11 new hotels at various stages of the planning and development process at an envisaged capital cost in the region of €440 million to €500 million.

Once again, tourism is at the forefront of the growth and recovery currently taking place in the Irish economy. The recovery in tourism has been driven by a competitive and quality tourism product supported by a number of important policy measures such as the 9% tourism VAT rate, which has proven to be one of most successful job creation initiatives in modern times with the positive impact on tourism exceeding all expectations in Ireland.

It is very clear, therefore, that changes to the VAT regime have had a very positive impact on Ireland’s tourism sector. The introduction of the reduced VAT rate in Ireland therefore appears to have met its original aims of driving employment and stimulating activity in the sector and has achieved this without placing a significant burden on the Exchequer.

Other features of the UK tax regime

Part 2.9 of the consultation document refers to other features of the UK VAT system that may benefit the tourism industry.

Whilst it is true that the UK has the highest VAT registration threshold in the EU and the OECD, a call for evidence16 is currently open which explores potentially reducing this threshold in future. The UK may also have several zero rates of VAT however as VAT policy is set by the EU, the categories of zero-rated item are common across the EU28. The UK’s Tour Operators Margin Scheme which simplifies VAT accounting on travel supplies is not unique to the UK. Ireland, for example, operates a similar scheme called the Travel Agents’ Margin Scheme.

So, whilst, the measures mentioned in the consultation document may indirectly benefit the tourism sector, they are not unique to the UK and do not give Northern Ireland any competitive edge or enable it to compete with the Republic on a level basis.

Costs arising from a lower VAT rate for tourism in Northern Ireland

As recognised in the consultation paper it will be necessary to determine the potential cost of lowering the VAT rate on tourism in Northern Ireland. The actual fiscal cost to the Northern Ireland Executive will need to be assessed in more detail but should be based on a methodology agreed between the Northern Ireland Executive and HM Treasury.

There is precedent for such an exercise which could usefully be drawn from. In 2015, the Corporation Tax (Northern Ireland) Act received Royal Assent. This legislation devolves corporation tax to the NI Executive and prior to its introduction required an exercise in assessing the potential impact of lowering the corporation tax rate on Northern Ireland corporate tax receipts.

If a lower VAT rate for Northern Ireland is taken forward as a policy, it will be necessary to continue to monitor and update forecasts in real time and as events change in order to provide an accurate assessment of likely costs.

As part of this exercise it will be necessary to establish the dynamic impact on VAT receipts arising as a result of additional income tax, corporation tax, excise duties, PAYE and national insurance from investment benefits accruing.

The ‘net’ cost approach i.e. the net loss to the UK exchequer should be the basis on which any adjustment to the NI block grant is made, subject to agreeing the methodology. This is clearly allowable under the Azores principle. It would be unfair to base the block grant adjustment solely on VAT receipt outturns only given the dynamic impact a rate reduction would almost certainly have.

Conclusion

We look forward to engaging in further consultation in the future once the Government has arrived at more firm proposals in this area. In the context of the foregoing, as a minimum we believe that the following key recommendations merit serious consideration as the Government takes this forward:-

Agree a methodology for, and carry out a full Exchequer impact analysis, under the net cost approach;

If a reduced rate is introduced in Northern Ireland, mirror the 9% rate in Ireland.

Freedom of Information

We note the scope of the Freedom of Information Act with regards to this submission. We have no difficulty with this response being published or disclosed in accordance with the access to information regimes. This response will be published on our own website in due course and will be available to all of our members and the general public.

Finally, do not hesitate to contact Brian Keegan (brian.keegan@charteredaccountants.ie) or Leontia Doran (leontia.doran@charteredaccountants.ie) of this office should you require anything further.

Yours sincerely,

Alan Gourley

Chairman

Northern Ireland Tax Committee

Chartered Accountants Ireland

Source: Chartered Accountants Ireland www.charteredaccountants.ie

10 Tourism Ireland press release, August 2017 https://www.tourismireland.com/Press-Releases/2017/August/Tourism-Ireland-welcomes-8-growth-in-overseas-vi

11 Selected VAT issues – Tax Strategy Group, The Department of Finance, July 2017 https://www.fi nance.gov.ie/wp-content/uploads/2017/07/TSG-17-06-VATIssues-GK.pdf

12 Budget 2018 Statement of the Minister for Finance and Public Expenditure and Reform Financial Statement http://budget.gov.ie/Budgets/2018/Documents/Budget_2018_Financial_Statement.pdf

13 “Retaining the 9% tourism and hospitality VAT rate to maintain competitiveness and ensure growth and prosperity in Ireland’s largest indigenous sector” – Irish Tourism Industry Confederation, July 2017 http://www.itic.ie/wp-content/uploads/2017/08/ITIC_BDO-Vat-Final-Report.pdf

14 “Retaining the 9% tourism and hospitality VAT rate to maintain competitiveness and ensure growth and prosperity in Ireland’s largest indigenous sector” – Irish Tourism Industry Confederation, July 2017 http://www.itic.ie/wp-content/uploads/2017/08/ITIC_BDO-Vat-Final-Report.pdf

15 “Retaining the 9% tourism and hospitality VAT rate to maintain competitiveness and ensure growth and prosperity in Ireland’s largest indigenous sector” – Irish Tourism Industry Confederation, July 2017 http://www.itic.ie/wp-content/uploads/2017/08/ITIC_BDO-Vat-Final-Report.pdf

16 VAT Registration Threshold: call for evidence, HM Treasury, March 2018 https://www.gov.uk/government/consultations/vat-registration-threshold-callfor-evidence