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UK Tourism Struggles Against Continuing European VAT Subsidies

Written by TMF

Monday, 18 February 2013 00:00

Richard Asquith of VAT Consultants TMF warns that the UK tourism industry risks being 'undercut' by mainland European competition thanks to lower VAT rates there.

News that Switzerland (Jan 2013) and Ireland (Dec 2012) have both decided to extend their reduced VAT rates on tourism and entertainment services will leave the UK industry struggling with one of the highest tax charges in Europe.

The number of overseas visitors coming to the UK has fallen from 33m in 2007 to 31m in 2012, which is costing the UK economy £1.1 billion per annum (source: The Office of National Statistics). This fall also coincides with the current economic downturn.

The UK is one of the very few European countries which levy the full, standard VAT rate on hotel accommodation, restaurants, theatres and catering services. Most other countries view tourism as a key strategic industry, and subsidise their sectors through reducing the VAT rate charged to visitors and locals.

The table below highlights the differences on VAT rates for tourism and ‘going out’, as against the standard rate for each country:

Country	Hotels	Restaurants	Theatres, Cinema	Standard Rate
UK	20%	20%	20%	20%
Ireland	9%	9%	9%	23%
France	7%	7%	5.5%	19.6%
Germany	7%	19%	7%	19%
Italy	10%	10%	10%	22%

All EU member states are obliged to follow the VAT rules as set by the European Commission, which usually require them to have a standard VAT rate above 15%. However, tourism is one of the exceptions where countries may apply locally-set reduced VAT rates.

In the past few weeks, both Ireland and Switzerland have agreed to extend their reduced VAT rate, for one and four years, respectively. They had originally introduced the temporary reductions following Germany’s decision to reduce its hotel accommodation VAT rate from 19% to 7% in 2010.

Richard Asquith, Global Head of VAT, TMF Group commented:

“Whilst Ireland and Switzerland have both raised their standard, headline VAT rates during the current financial crisis, they still see tourism as a key industry for employment so have extended their reduced VAT charge. What started out as temporary initiatives now seem to be becoming permanent – copying the rest of Europe. The UK’s 20% VAT rate on tourism leaves the industry challenged and probably with a further squeeze on their margins as tourists will resist price rises.”

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HMRC Finally Updates Guidance on VAT Bad Debt Relief

Tax News - VAT & Excise Duties
Written by Lee Sharpe
Friday, 08 February 2013 00:00
We are pleased to note that HMRC has finally revised VAT Notice 700/18 Relief from VAT on Bad Debts TaxationWeb pointed out over a year ago in Can We Trust HMRC Advice? that HMRC's guidance on reclaiming VAT Bad Debt Relief still failed to mention that the time limit for making claims had been extended from 3 to 4 years. This change - in favour of the taxpayer - was introduced for VAT purposes in April 2009. While the new guidance is welcome, it is surprising that it has taken almost four years for the guidance to be updated. As we said in our previous article, it is difficult to believe that HMRC would have been so slow to correct its guidance if the time limits had been restricted from four years down to three! Write comment (0 Comments)

The New Machine Games Duty Starts Today - Flat Rate Scheme Operators Beware!

Tax News - VAT & Excise Duties
Written by Lee Sharpe
Friday, 01 February 2013 00:00
The new Machine Games Duty, or MGD, is applied to games machines from 1 February and applies basically to all games machines where the player stands to win back a cash prize of more than the money "staked". All affected licence holders should now be registered, and HM Revenue & Customs may charge penalties if they are not. While the MGD is generally charged at 20% - just like VAT - it is not a "taxable supply" for VAT purposes but exempt, meaning that affected operators may now struggle to reclaim some or all of the VAT back on their costs. Those traders who have been using a Flat Rate Scheme may be particularly badly affected, as HM Revenue & Customs has confirmed they will now have to account for VAT at the Flat Rate and MGD on machine takings. This is because the Flat Rate is meant to cover ALL supplies made by a business, including those which are exempt. (Although regular readers may recall that HMRC lost their fight over bank interest - CIOT Challenges HMRC on VAT Flat Rate Scheme and Bank Interest) In theory, HM Revenue & Customs could review the Flat Rate percentages in affected sectors and reduce them to reflect the reduced VAT that would be accounted for using the standard method. But they have confirmed that there is currently no intention to do so. HMRC points out that the Flat Rate Scheme is meant to simplify VAT for smaller traders rather than to save money and if the percentage now seems unfair, it is possible to leave the Scheme and go back to the 'normal' method of VAT accounting. Rob McCann, director of The VAT People, said: "The change from VAT to Machine Games Duty is causing a number of headaches for operators of gaming machines. The VAT implications of the change, of which the Flat Rate issue is one, are proving to be particularly troublesome and affected businesses must take steps to ensure that they do not incur a significant VAT bill as a result of the change". For further information on the Flat Rate Scheme and registration, see Reminder - Games Machine Operators Have Until 11 January to Register for New Tax Write comment (0 Comments)

Reminder: Games Machines Operators Have until 11 January to Register for new Tax

Tax News - VAT & Excise Duties
Written by Lee Sharpe
Tuesday, 08 January 2013 00:00
Gaming machine operators have until 11 January to register for a brand new tax, Machine Games Duty, (MGD), which will come into effect from 1 February and applies where the player can win a cash prize greater than the cost to play. It will replace VAT (on net takings) and Amusement Machine Licence Duty (an annual charge). It will apply to machines in: Bookmakers Amusement arcades Bingo halls Casinos Pubs, clubs and other venues HM Revenue & Customs has guaranteed to process all applications for registration received by Friday 11 January; applications received after that date may not be processed in time for 1 February when the MGD starts, leaving late applicants exposed to a penalty. There is a special online registration service at Machine Games Duty Online Further information on Machine Games Duty can be found at Machine Games Duty Operators should also be aware that, from 1 February, at least some of their supplies (the takings from machines subject to the new MGD) will be exempt from VAT so they will be affected by the VAT "Partial Exemption Regime". Write comment (0 Comments)

Welcome News for "Mixed" UK VAT Groups: Advocate General's Opinion on Irish VAT Groups Says Non-Taxable Members are Eligible

Tax News - VAT & Excise Duties
Written by Lee Sharpe
Wednesday, 28 November 2012 00:00
Introduction The Advocate General delivered his opinion yesterday (27 November) on whether or not non-taxable persons could validly be included in a VAT group. The Irish case has strong parallels with the domestic treatment here in the UK and will be encouraging for the many UK businesses with VAT groups containing passive holding companies, and/or dormant companies, pending formal judgment expected early 2013. Background Several countries, including the UK and Ireland, allow non-taxable persons to be included in VAT groups for ease of administration. From a UK perspective, a typical example would be a holding company that does little more than passively hold shares in the group's 'active' companies. Or, a dormant subsidiary that is maintained within an overarching group registration for convenience. From a UK perspective, membership of a VAT group may potentially also allow a non-taxable but active company (e.g., a charity) to reclaim Input VAT under the Partial Exemption rules, thereby granting an opportunity to reclaim VAT that it might not enjoy as a standalone company. Other member states have objected to this facility and almost exactly three years ago, the European Commission instigated infringement proceedings which required the 'offending' countries to change their domestic rules in line with other member states. If the UK had simply complied, it might have meant that large numbers of UK VAT groups would have had to eject their holding companies, and/or dormant members. However, HMRC has consistently disagreed with the European Commission on this point, and has since robustly defended the UK position alongside its fellow recalcitrants. Opinion The Advocate General has published his opinion on the Irish case as being broadly representative of the issues at stake for the other countries and his opinion resoundingly favours the argument that non-taxable persons may be included, for instance at paragraph 52: "However, in my opinion it is not an anomaly that non‑taxable persons can belong to a VAT group." Of course it is the judgment in the UK Case C86-11 which is most important but the judgment is rarely at odds with the Advocate General's opinion, which bodes well for the final decision next year. Write comment (0 Comments)