Tourism Alliance Submission on 2005 Budget

Budget 2005 - Fiscal Priorities for Tourism

With the current development of the 2005 budget, I am writing to you in my capacity as President of the Tourism Alliance, the industry body that represents over 250,000 travel, tourism, hospitality and leisure businesses of all sizes throughout the UK, to highlight the Alliance’s priorities for ensuring that the tourism industry is well positioned to contribute to the UK’s economic growth.

I have written to you previously explaining the importance of the tourism industry to the UK economy, highlighting that is Britain’s 5th largest industry, generating £75bn per annum (approx. 5% of the UK’s GDP) and supporting 2.1m FTE jobs (7.6% of total employment). Over the last 30 years, tourism has shown itself to be a major growth industry and governments around the world are increasing their investing in the sector as they recognising the economic benefits that flow from tourism development.

This increased competition for international travellers has caused the UK’s tourism earnings to slip to number 7 in the World Tourism Organisation’s barometer of international tourism destinations. There is, therefore, a need for the industry to further improve its productivity and for Government to remove barriers to the industry’s international competitiveness.

As such, the Tourism Alliance is pleased with the progress that the Government has made in addressing tourism issues this year. Most importantly, the Government should be congratulated on the Aviation White Paper. This is a key step to ensuring that the tourism industry is able to deliver core social and economic benefits for UK citizens.

Second, the Tourism Alliance was heartened by the launch of DCMS’s National Tourism Strategy “Tomorrow’s Tourism Today”. The aim of this strategy is to grow tourism in Britain from a £75bn pa industry to a £100bn pa industry by 2010. The industry is very keen to work in partnership with Government to ensure that this target is achieved as it would provide considerable benefits for the UK economy, including the creation of 500,000 additional FTE jobs.

These Government initiatives come at a significant time for the industry as it recovers from four years of depressed earnings caused by the Foot and Mouth outbreak, terrorist attacks such as 9/11, SARS and conflicts in Afghanistan and Iraq. Recent ONS figures suggest that visitor numbers to Britain and, more importantly, visitor expenditure, has risen significantly for the first time since 1999. The value of tourism to the UK has risen 8% in the first nine months of this year and is forecast by the WTO to rise to £12.7bn by 2005. Much of this growth is forecast to come from emerging markets in Asia and Eastern Europe.

While the tourism industry is cautiously optimistic about the future, there is still some considerable way to go before it can be said to be on a sound footing. The recent rise in oil prices is putting considerable strain on a very price sensitive industry and the threat of a major terrorist attack that could have a devastating impact on global travel continues to hang over the industry.

The fragile nature of this recovery is highlighted by a recent Experian survey. This survey showed that Return on Capital Employed (ROCE) in the UK’s Leisure and Hotels sector has fallen from 12.6% in 1999 to 6.6% in 2003, with even the most successful companies seeing a very direct impact on their bottom line. As such, the Tourism Alliance believes that Government can only achieve its vision of a £100bn industry by 2010 if we are able to increase the financial performance of tourism businesses.

Therefore, the Tourism Alliance strongly councils against any budgetary initiatives that would impose costs on the industry at this stage of the recovery cycle. Rather, Government should be looking to consolidate this recovery by removing impediments to the UK tourism industry’s competitiveness.

Below I have listed what the Tourism Alliance see as the major impediments to the future competitiveness and productivity of the tourism industry.

1.0Tourism Funding

The single most beneficial step the Government could take is to address the seven year stagnation in the funding of VisitBritain (equivalent to a 17% reduction in funding in real terms). The most pressing need is to provide additional funding for VisitBritain to break-into rapidly developing markets such as China, South Korea, Russia and India, where there is a large pent-up demand for travel. Other Governments have identified the long-term benefits of developing their brands in these markets and are committing considerable resources to establishing a strong national presence. That VisitBritain does not have sufficient funding to maintain its core activities and establish the Britain brand in these emerging markets is restricting the UK’s ability to fully exploit trade opportunities.

That VisitBritain can provide significant benefits for UK is highlighted by the recent NAO report “VisitBritain, Bringing Visitors to Britain”, which states that “there is little doubt that its activities are generating high returns”. In 2003, this equated to the generation of £1bn in receipts from an investment of just £35.5m. Similarly, the “Only in Britain, only in 2002” campaign, when £20m from the Treasury Reserve was used to leverage £25m from the industry, resulted in an additional 1.1 million visitors and £518m for the UK.

To develop these emerging markets requires an immediate increase VisitBritain’s Grant-in-Aid of at least £5m pa. With the imminent signing of the Approved Destination Status agreement with China, the forthcoming budget provides the opportune time for VisitBritain to use this funding to work with the British Council and other UK agencies in putting together a development programme that would generate long-term trade benefits for the UK. This move would support the recommendations of the NAO report which state that more emphasis needs to be placed on promoting the UK in developing markets.

2.0Increasing Skills in the Tourism Industry

There is considerable optimism within the industry that the establishment of People1st, the new Skills Sector Council for tourism, will be able to address the productivity problems that occur due to skill shortages in the industry. The Tourism Alliance believes that to ensure that this initiative has the greatest opportunity of succeeding, there should be a tax credit system to reimburse employers who undertake training of their staff in basic skills, including numeracy, literacy, communications and ICT. This might be a simple credit through National Insurance Contributions, with a 1% rebate in early years rising to 4% within five years. In the longer term, this tax credit might usefully be extended to basic craft, supervisory and management skill training in the workplace, and underpin the attainment of an industry-wide qualification.

3.0Air Passenger Duty

The Tourism Alliance strongly believe that, in order to stimulate travel and increase revenue from visitors to Britain, Air Passenger Duty, the levy on all passengers departing from a UK airport should be revised. This tax (£5-£10 for travel to an EEA destination and £20-£40 for travel to a non-EEA destination) was introduced in 1995 as an environmental tax. However, it has little impact on reducing the environmental impact of aircraft and, combined with the rise in budget airlines, has created a situation whereby the tax now constitutes up to 20% of the total cost of some travel.

This situation affects the competitiveness of Britain as a tourism destination within Europe where no other country applies a departure tax on EU citizens as part of general revenue collection.

The Tourism Alliance believes that this blunt tax should ultimately be replaced with an emissions trading system. As an interim measure however, the tax could be revised so that it is applied to aircraft rather than passengers and be levied on the basis of the aircraft’s pollution creating characteristics. The revenue generated by the tax should then be hypothecated to mitigating the environmental impacts of aircraft flying from UK airports.

By revising the tax in this way, there is an incentive for airlines to switch to less polluting aircraft and to further improve their load factors, while at the same time a fund is established that is able to be used to undertake environmental protection work in areas surrounding airports.

4.0VAT Differentials

The other main area of concern continues to be international VAT differentials. We urge the Government to reduce international tax disadvantages that currently prevent the UK from being as competitive as other European destinations.

VisitBritain’s study of the comparative taxation on American visitors to a number of European destinations found that taxation accounts for approximately 18.3% of the cost of staying in Britain for the American visitors, 50% more than the average of approximately 12.1% for the other major European destinations. Moreover, taxes relating to accommodation and airfare charges accounted for approximately 85% of the divergence.

Similarly, the World Travel and Tourism Council (WTTC) continually find that the taxation rate on tourism accommodation in the UK makes the country one of the least price competitive destinations in the world. This lack of competitiveness in Europe is also being accentuated by the new accession states to the European Union, all of which have much lower cost structures than the UK and are vigorously competing in the European tourism market.

At 17.5%, the VAT rate on tourist accommodation is higher in the UK than in all but two other EU Member States (Denmark and Slovenia). We continue to note that Government has the ability under the 6th EC VAT Directive to apply a lower rate of VAT on tourist accommodation and we urge the Government to consider this issue further.

In addition, we are aware that our European competitors are anxious to maintain and, indeed, increase, their competitive advantage. For example, the French Government formally made representations to the European Commission last year to reduce the level of VAT on its restaurant services. This is in addition to France’s already low rate of VAT on accommodation (5.5%).

A second form of VAT differential that adversely impacts on the tourism industry is the 17.5% charge for property refurbishment, including listed building repairs, compared to the zero rating for newly built property. As the UK’s tourism industry heavily depends on the historic and cultural fabric of the country, this differentiation places considerable strain on the maintenance and refurbishment of the historic resources on which the industry depends.

5.0Conclusion

In conclusion, the Tourism Alliance acknowledges that some advances have been made this year in building a stronger industry that will provide the UK with sustainable growth into the future. However, there needs to be an increase in investment in tourism, especially in the developing markets, if the UK is to regain its position as the 5th largest tourism destination in the world. There are also a number of fundamental structural issues that undermine the UK’s competitiveness both within Europe and globally that need to be addressed in order for the UK’s tourism industry to compete effectively.

Finally, I would like to assure you that the Tourism Alliance and, indeed, the industry as a whole is committed to working with the Government to implement new proposals that will improve the productivity and competitiveness of the UK tourism industry. What it seeks from government is an understanding of the economic and social benefits derived from tourism and the impact that any proposed measures in the budget will have on the 250,000 businesses that comprise this sector.