AAB: targeted tax relief could aid hospitality’s recovery

Indirect tax changes can help revitalise the tourism and hospitality sector, writes Alistair Duncan

One initiative that the Chancellor did announce in the Autumn Budget was the introduction of a reduced rate for draught product sold in large containers.
One initiative that the Chancellor did announce in the Autumn Budget was the introduction of a reduced rate for draught product sold in large containers.

There are few sectors that are as important to the Scottish economy – and which have suffered as much during the Covid-19 pandemic – as tourism and hospitality.

As an industry, it is unique in being a major employer not only in our cities, but also in rural areas.

However, as it looks to get back on track, it is being seriously affected by the staff shortages being experienced across the UK.

Alistair Duncan of AAB: “Extending the reduced VAT rate permanently could have been an easy way to support the UK’s beleaguered hospitality and tourism sectors”

Given its vital position in the economy, it is an industry that deserves support from government.

Whether for environmental or lifestyle reasons, indirect tax is often seen as a way of influencing behaviours – this could be a punitive tax to discourage unhealthy habits, or targeted reliefs to support specific sectors.

This latter purpose was clearly demonstrated last year by Chancellor Rishi Sunak when he announced the temporary reduction in the VAT rate,a move which was aimed at providing a stimulus to the hospitality sector.

Initially cut to 5 per cent from 15 July, 2020 until 12 January, 2021, this measure proved to have a limited impact as the ongoing coronavirus restrictions meant that many businesses were physically forced to close their premises, and they were unable to benefit from the lower rate.

Consequently, the reduced rate was subsequently extended until 31 March, 2022, with the last six months being at a higher reduced rate of 12.5 per cent.

Unfortunately, following the Budget in October, there does not 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 per cent to 50 per cent higher than rates seen elsewhere in Europe.

Extending the reduced VAT 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 Autumn Budget was the introduction of a 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 alcohol by volume (ABV) figure of less than 8.5 per cent, sold in containers of at least 40 litres in capacity.

While 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, 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 and 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 UK-based holidays – aka “staycations” – has seen a boost to the tourism sector in 2021, though it is unclear whether the removal of the Red List quarantine requirements for overseas travel will see that increase extend into 2022.

Though perhaps not the main driver behind the measure, the introduction of an increased Air Passenger Duty on “ultra-long-haul flights”, coupled with the new lower rate of the tax 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.

Alistair Duncan is a director and head of indirect tax at Anderson Anderson & Brown (AAB)