Cheers to Indirect Tax relief!

25 November 2021

Indirect Tax changes can help revitalise the tourism and hospitality sector 

There are few sectors that are as important to the Scottish economy, and which have suffered as much during the pandemic, as the tourism and hospitality sector. As a sector, it is unique in being a major employer not only in our cities but equally in rural areas. However, as the sector looks to get back on track, it is being further affected by the staff shortages being experienced across the UK. 

Given its vital position in the economy, it is an industry that deserves support from the government. Whether it is for environmental or lifestyle reasons, indirect tax is often seen as a way of influencing behaviours. This could be a punitive tax discourage unhealthy habits or targeted reliefs to support specific sectors. 

This latter point was clearly demonstrated last year by Rishi Sunak with the temporary reduction in the VAT rate aimed at providing a stimulus to the hospitality sector. Initially cut to 5% for the period from 15th July 2020 until 12 January 2021, this measure had limited impact as the ongoing lockdown meant that businesses were forced to close meaning they couldn’t benefit from the lower rate. Consequently, the reduced rate was subsequently extended until 31 March 2022; with the last 6 months being at a higher reduced rate of 12.5%.    

Unfortunately, following the October Budget, there doesn’t appear to be an appetite in Government to extend this relief further. This is disappointing for the sector as the VAT rates applied in the UK on the supply of restaurant and catering services; hotel accommodation; and admission to amusement parks and sporting events is on average 25-50% higher that rates seen elsewhere in Europe. Extending the reduced rate permanently could have been an easy indirect tax measure to support the UK’s beleaguered hospitality and tourism sectors. 

One initiative that the Chancellor did announce in the Budget was the introduction of a new reduced rate for draught product sold in large containers. This measure, intended to support the on-sales drinks trade, is aimed at draught beer and cider with an ABV of less than 8.5% sold in containers of at least 40 litres. 

Whilst any measure aimed at supporting the on-trade and encouraging customers into pubs and restaurants is to be welcomed, as currently envisaged, this new draught product relief will favour the major drinks brands at the expense of smaller craft beer producers and micro-breweries. These smaller producers tend to supply pubs in smaller containers, commonly 30 litre kegs, and so which will not qualify for the relief. 

The draught product relief is the government’s preferred option to drive consumer habits based upon the place of retail. Another option proposed following the call to evidence held last year was a duty relief linked physically to the site of production.   

With so many excellent visitor experiences at Scottish distilleries or breweries, such a ‘cellar door’ scheme for sales from the production site could have encouraged continued investment, driven footfall, increased local tourism and provided a wider boost to local economies. Unfortunately, this option was rejected by the Government as it was felt that, by favouring producers operating from sites that are suitable for tourism, such a relief would be unfair. This is a somewhat counter-intuitive reason for rejecting a hospitality relief!  More importantly, it is a missed opportunity for a targeted relief for the hospitality sector.   

The trend towards domestic holidays and staycations has seen a boost to the tourism sector in 2021. However, it is unclear whether the removal of the red list quarantine requirements for overseas travel will see that increase extend into 2022. Perhaps not the main driver behind the measure; however, the introduction of an increased Air Passenger Duty on “ultra-long-haul flights” coupled with the new lower rate of air passenger duty on flights between UK airports from April 2023 may encourage more domestic holidays. 

At AAB, our Food, Drink and Hospitality team is committed to supporting the hospitality and tourism sector. This includes helping businesses understand the impact of changing indirect tax measures on their business. 

For further information or assistance, contact Alistair Duncan or your usual AAB contact.

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