Journal of Vacation Marketing
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Are high taxes damaging British tourism?
Michael Nevin
Journal of Vacation Marketing 1999; 5; 94
DOI: 10.1177/135676679900500108
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Journal of Vacation Marketing
Volume 5 Number 1
Are high taxes damaging British tourism?
Michael Nevin
Received: 11th August, 1998
Refereed anonymously
Kilgour, Spencer Place, Edinburgh EH5 3HF
Tel: 0131 552 8786; fax: 0131 552 7989
email: Mike.nevin@sol.co.uk
www.calecon.com
Michael Nevin is a Director of Caledonian Economics Ltd, an independent consultancy
which provides economic and financial advice
to the travel and tourism industry. He was previously employed as a mangement consultant
with Deloitte & Touche, in which capacity he
acted as Project Manager of two major studies
undertaken to assess the wider impact of
tourism taxes: ‘The Economic Impact of Air
Passenger Duty’, commissioned by the
Council for Travel and Tourism; and ‘The Economic Effects of Changing VAT Rates on the
British Tourism and Leisure Industry’, commissioned by the VAT Working Group of the British
Tourist Authority.
The views expressed in this paper are personal ones, and not those of any organisation
for which Michael Nevin has worked.
ABSTRACT
KEYWORDS: tourism taxes, Council for
Travel and Tourism, British Tourist
Authority, VAT levy, Air Passenger Duty
Journal of Vacation Marketing
Vol. 5 No. 1, 1999, pp. 94–100,
© Henry Stewart Publications,
1356-7667
British tourism taxation policy clings to five central
tenets, whose lack of credibility is examined carefully in this paper. The Council for Travel and
Tourism and the British Tourist Authority have
commissioned two major studies concerning the
impact of taxes upon the industry. In his position
as Project Manager for these studies, the author has
been able to clarify some of the major issues below.
INTRODUCTION
‘The art of taxation,’ commented Jean-Baptiste Colbert, Treasurer to King Louis XIV of
France, ‘consists in so plucking the goose as
to obtain the largest number of feathers with
the least possible amount of hissing.’
As the number of feathers plucked from
the British tourism goose has increased, the
sounds of hissing have started to get louder.
Until comparatively recently, the travel and
tourism sector suffered in silence as new
taxes were introduced and old ones raised.
The fragmented nature of the industry
meant it was difficult to develop an effective
lobby in support of a common position. In
this regard, tourism is at a disadvantage compared to sectors characterised by greater producer concentration. With fewer players,
they find it easier to form effective lobbies
when their interests are threatened. A case in
point is the Scottish whisky lobby which
mounted a successful campaign during the
mid-1990s against the rise in whisky duties.
A key element in the whisky campaign
was the compelling nature of the industry’s
case that duties had risen to a level where
higher rates of duty generated lower tax
yields because of consumer resistance. Surprisingly, there is little evidence that the UK
Treasury has ever undertaken a similar
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Nevin
assessment of the impact of tourism taxes on
consumer demand. Insofar as increases in
the burden of taxation on travel and tourism
have been justified at all, the justification has
been by reference to five general assertions.
These assertions had never been subjected to
rigorous independent scrutiny until the
industry itself, alarmed at the damage
inflicted by high tax rates, commissioned two
major studies of their impact. ‘The Economic Impact of Air Passenger Duty’ was
commissioned by the Council for Travel and
Tourism, the umbrella organisation of the
UK travel industry, and published in January
1998.1 ‘The Economic Effects of Changing
VAT Rates on the British Tourism and
Leisure Industry’ was commissioned by the
VAT Working Group of the British Tourist
Authority, which includes representatives of
many leading British travel and tourism
associations, and was published in April
1998.2
This paper draws extensively on the
author’s research findings as Project Manager
for these two studies.
THE FIVE CENTRAL TENETS OF
BRITISH TOURISM TAXATION POLICY
Official defence of the progressive increase
in the burden of taxation on UK travel and
tourism has been based on one or more of
five central assertions. These assertions take a
number of forms, but in essence boil down
to the following:
(1) ‘The rate of taxation on UK travel and
leisure is not particularly high compared
to our leading competitors.’
(2) ‘British tourism is prospering, so why
worry about taxes? The industry should
pay its fair share to the Exchequer, just
like everyone else.’
(3) ‘Higher taxes are not harming international demand for UK tourism. Britain’s market share has not fallen any
more rapidly than that of our leading
competitors in recent years.’
(4) ‘There is no evidence that higher tax
rates reduce demand for travel and
tourism.’
(5) ‘The Chancellor of the Exchequer
simply cannot afford to lose the revenues
which he gets from travel and tourism.’
Taken together, these five assertions — if
true — would represent a persuasive case for
rejecting the industry’s pleas for a more lenient tax regime. The problem is that they are
just that — assertions, unsubstantiated by
any hard factual evidence emanating from
Her Majesty’s Treasury or the Department
of Culture. So just how well do they stand
up against the available evidence?
‘The rate of taxation on UK travel and
tourism is not high’
The rate of VAT levied on visitor accommodation in each member state of the European Union and Norway at the end of 1997
is shown in Figure 1. The figure shows that
the UK levied the second highest rate of
VAT on visitor accommodation of the 16
Western European countries in the sample.
Only Denmark levied a higher rate. The UK
is currently only one of three Western European countries to levy VAT at the standard
rather than reduced rate. The standard rate
of 17.5 per cent levied on UK visitor accommodation is twice as high as the EU average
of approximately 8.5 per cent.
The UK also levies a wide range of special
taxes on travel and tourism. One worthy of
note is Air Passenger Duty (APD), introduced on 21st October, 1994 at £5 per
passenger departing from any UK airport on
a domestic or EU flight, and £10 per passenger departing on flights terminating outside
the EU. These rates were doubled on 1st
November, 1997. This tax is in contravention of the Chicago convention, under which
all signatories agreed not to levy taxes on
international travel. The UK is unique
among the major OECD nations in levying
such a tax. In the author’s research for the
Council for Travel and Tourism, only two
other countries were identified which levied
similar taxes on air travel, Norway and Denmark.
With the doubling of APD in November
1997, the UK now has the highest taxes in
Europe (with the possible exception of Denmark) on the two most visible elements
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Are high taxes damaging British tourism?
Figure 1
The rate of VAT levied on visitor accommodation in the member states of the EU and Norway in
1997
Source: Hotrec.
within a tourism package, namely air travel
and accommodation.
‘British tourism is prospering, so why
worry?’
Has the high incidence of taxation on travel
and tourist accommodation had an adverse
impact on British tourism?
Until recently, the response from the
Department of Culture, the sponsoring ministry for tourism in England and Wales, was
one of simple denial. The official view was
characterised by a marked complacency
about tourism’s performance and prospects.
This complacency may have been somewhat
dented by the experience of the 1998 season,
as evidence has mounted that the British
tourism balance is headed for a record deficit. But officials within the Department of
Culture are nothing if not adaptable, and a
number of explanations have been put forward for the poor 1998 season — including
the weather, the World Cup in France and
the strength of sterling.
No doubt all of these factors have had an
effect on the British tourism balance. However, the 1998 season has not been a once-off
aberration within a longer-term pattern of
success. Figure 2 shows the trend in the UK
tourism balance over the past 20 years, and
clearly illustrates that the UK’s tourism
balance has shown a steady decline over that
period. The figure shows that the UK
enjoyed a surplus on its tourism account
during the 1970s. The surplus was equivalent to almost a quarter of her total international tourism receipts in 1979. Even as
late as 1985, the UK tourism balance showed
a surplus of 10 per cent of her international
tourism receipts. But since then, the story
has been one of unremitting decline. By
1994, the total deficit amounted to more
than £4.5bn and UK residents spent almost
half as much again on visits abroad as the
UK earned from overseas visitors.
The inescapable conclusion is that, while
1998 will almost certainly mark the largest
ever deficit on the UK’s tourism balance,
there is no reason to expect any improvement in the future. On a ‘no change’ policy
scenario, the most likely outlook is for a
continuing deterioration.
‘Britain’s market share in tourism has
not fallen any more rapidly than that of
her major competitors’
According to this argument, while the UK’s
tourism balance may have deteriorated, there
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Nevin
The long-term deterioration in the UK’s tourism balance, 1975–1995
Figure 2
Source: Adapted from BTA, ‘Digest of Tourist Statistics No. 20’, December 1996, Table 8, p. 13.
is nothing exceptional about this. It is part of
a wider trend in international tourism away
from Western Europe towards North
America and the emerging markets of the
Far East and Latin America.
It is indeed true that the rate of growth of
international tourism has been lower in
Western Europe than in many newer destinations, so that the overall share of international tourism receipts earned by the
European Union has declined. However, it is
not true that the decline in the UK’s market
share has been in line with the EU average.
It has been much faster, as Figure 3 shows.
Figure 3 shows that the USA’s market
share almost doubled, from 9.56 per cent in
1980 to 17.48 per cent in 1994, while those
of the major European destinations (France,
Spain and Italy) all fell slightly by an average
of 0.6 per cent each. The decline in the UK’s
market share has been much more dramatic
than any of her major continental partners.
The UK earned 6.55 per cent of all international tourism receipts in 1980; by 1994,
International tourism receipts: percentage share of six major destinations in 1980 and 1994
Figure 3
Source: WTO ‘Yearbook of Tourism Statistics’, 48th edn, Madrid, 1996. Ireland’s market share has been
multiplied by 10 to put it on a comparable basis with the other EU countries in the sample, all of which have at
least 10 times Ireland’s population and GDP.
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Are high taxes damaging British tourism?
her share had fallen by over two full percentage points to just 4.40 per cent.
‘There is no evidence that higher tax
rates reduce demand for travel and
tourism’
To test this hypothesis, the rate of VAT levied on visitor accommodation within the EU
member states was regressed against the rate
of growth of the international tourism
receipts of each state during the first half of
the 1990s. The results are shown graphically
in Figure 4 below. The figure shows that,
during the period under consideration, there
was a clear, statistically significant negative
relationship between the rate of VAT levied
on visitor accommodation and the rate of
growth of international tourism receipts
within the member states of the EU.
The figure shows that the higher the level
of tax levied on the tourist, the lower the
rate of growth of tourism revenues. The
correlation coefficient of 0.65 suggests that,
statistically, there is a 99 per cent probability
that the two factors are related and only a 1
per cent probability that the negative relationship is due to chance.3
Substantial evidence from case studies and
econometric analysis supports the view that
Figure 4
tourism is highly price-sensitive and that if
the rate of tax levied on tourism increases,
receipts from tourism will fall — leading
ultimately to a fall in the overall tax yield
from tourism. For example, the Economist
Intelligence Unit estimated in 19934 that
European short-haul tourism displayed a
price sensitivity of between 1.0 and 1.5,
while tourism from the USA to Europe had
a much higher elasticity of 2.5. The
author’s own recent research5 indicated that
the elasticity of the UK’s international
tourism receipts with respect to the tradeweighted exchange rate of sterling is 1.4,
again with a higher sensitivity for American
visitors than French or Spanish visitors.
In countries where the rate of VAT applicable to tourism services has been cut, it has
stimulated growth within the tourism
industry. For example, the Irish Government
halved the rate of VAT applying to visitor
accommodation and restaurant meals in the
mid-1980s. Following these reductions, the
number of overseas visitors to Ireland
increased sharply from 1.9 million in 1986 to
4.7 million in 1996. This generated strong
growth in Ireland’s receipts from international tourism, which rose almost twice as
fast as the UK’s over the period. The overall
Relationship between rate of VAT on accommodation and growth in international tourism receipts
1990–1994
Source: Adapted from Hotrec data (for the rate of VAT on visitor accommodation) and WTO data (for
international tourism receipts of the 15 countries in the sample over the period 1990–1994).
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Nevin
yield from VAT on Irish tourism has more
than doubled since the late 1980s.6
A similar effect can be seen in the case of
Air Passenger Duty. In our work for the
Council for Travel and Tourism, we carried
out a rigorous econometric analysis of the
factors driving passenger demand on the
Milan–Manchester air route. This analysis
indicated that APD, considered as a separate
factor after allowing for seasonal influences,
income, price and airfare changes, reduced
passenger demand on the route by approximately 0.7 per cent over the year following
its introduction. This may underestimate the
total effect of APD as it only takes account of
any effect over and above that due to price
changes.
The findings of this analysis have been
confirmed by a separate study by British Airways, who examined the impact of APD on
passenger numbers on a representative
sample of five routes and identified a clear
dampening effect following its introduction.
‘The Chancellor of the Exchequer
cannot afford to cut taxes on travel
and tourism’
As part of the research undertaken for the
British Tourist Authority, a fiscal model was
developed which simulated the effects of
lower VAT on visitor accommodation. The
model estimated that a direct loss of VAT
receipts of £0.4bn as a consequence of
cutting VAT from 17.5 per cent to 8 per cent
would be more than offset by indirect gains
in income and corporation tax and reductions in social security payments. Overall,
there would be a net gain to the Treasury of
just over £0.2bn pa if VAT rates on visitor
accommodation were cut to bring them into
line with the European Union average
(Figure 5).
Similar simulations were carried out of the
direct and indirect effects of Air Passenger
Duty to calculate that the net loss of receipts
from inboard travellers to the UK compared
to a ‘no tax’ scenario. These simulations
indicated that APD dented travel demand
from inbound visitors by 1–2 per cent below
what it would otherwise have been. This
resulted in the loss of approximately £180m
in the UK’s international tourism receipts
and 6,000 less jobs in the travel and tourism
industry.
The total loss of income to the UK travel
and tourism industry as a result of the introduction of APD was approximately double
the loss from inbound tourism considered
A simulation of the direct and indirect effects of a reduction in the rate of VAT levied on visitor
accommodation in the UK over a 10-year period
Figure 5
Source: Deloitte & Touche fiscal model simulations. Full details are included in ‘The Economic Effects of
Changing VAT Rates on the British Tourism and Leisure Industry’, British Tourist Authority VAT Working
Group, April 1998.
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Are high taxes damaging British tourism?
separately, because of lower demand for
domestic and outbound travel.
These results are consistent with separate
calculations undertaken by the UK Civil
Aviation Authority (CAA). Applying their
econometric model of air travel demand, the
CAA estimated that the loss to the industry
from the rate of APD applying between 1994
and 1997 was £364m pa.
The overall conclusion of the research
carried out for the Council for Travel and
Tourism was that, at the levels at which
APD applied between 1994 and 1997, it
probably generated a small increment in
revenues for the British Exchequer. But the
net gain in tax yields might have been as
little as a fifth of the total annual APD yield
of £480m, because of the loss of taxation
revenue from airlines and travel and tourism
operators compared to a ‘no APD’ scenario.
The total loss to the UK following the
doubling of APD in November 1997 may be
more than twice this amount, for three
reasons:
— there is likely to be a greater degree of
resistance to APD among travellers —
particularly budget travellers — as APD
rises in absolute terms and as a proportion of the ticket price;
— until recently, airlines separated out APD
and did not necessarily include it within
the quoted ticket price. This will not be
possible in the future following a
November 1997 decision by the Advertising Standards Authority prohibiting
this practice;
— the doubling of APD during a period
when sterling is strong is likely to exacerbate its impact because of the ‘double
whammy’ effect of higher taxes and a
strong currency.
So far from it being the case that the
Chancellor ‘cannot afford’ to cut tourism
taxes, the available evidence suggests that tax
yields from travel and tourism might actually
increase if tax rates were reduced.
CONCLUSIONS
There is a very real risk that Britain’s policy
makers may regard travel and tourism as
growth sectors which represent easy targets
for raising taxes. The problem is that these
sectors are also highly price sensitive. If taxes
are raised too high, internationally mobile
travellers will switch to cheaper destinations.
There is growing evidence that the rising
burden of taxation is gradually eroding the
ability of the UK industry to compete, and is
contributing to the sharp decline in the UK’s
international market share and to the severe
deterioration in her international tourism
account.
The goose is being plucked so aggressively
that it is not just hissing loudly, it is struggling to replenish its feathers. It may not be
possible for the Chancellor to gather so
many feathers from it in the future.
This is bad news for Britain, but good
news for her major competitors such as
France. For Jean-Baptiste Colbert’s successors on the other side of the Channel are not
making the same mistake as the British
Chancellor.
REFERENCES
(1)
(2)
(3)
(4)
(5)
(6)
Copies of the report are available from the
Council for Travel and Tourism, Vigilant
House, 120 Wilton Road, London
SW1V 1JZ, £20.
Copies of the Executive Summary of the
report are available free of charge from the
British Tourist Authority, Thames Tower,
Black’s Road, Hammersmith, London
W6 9EL.
It should be emphasised that this does not
mean that differential VAT rates are the only
factor influencing international tourism
receipts, only that they are one (statistically
significant) factor.
Economist Intelligence Unit (1993) ‘Price
Competitiveness of Holiday Destinations’.
BTA (1998) ‘The Economic Effects of
Changing VAT Rates on the British
Tourism and Leisure Industry’, Phase Two
Report, Section 5, April.
A more detailed analysis of the factors driving the growth of Irish tourism is contained
in Nevin, M. (1995) ‘A case study in policy
success: the development of the Irish
tourism industry since 1985’, Journal of Vacation Marketing, Vol. 1, No. 4, pp. 363–375.
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