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Impact of VAT (Value added Tax) Increase on Tourism industry

Info: 2930 words (12 pages) Dissertation
Published: 11th Dec 2019

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Tagged: FinanceTourism

To evaluate the impact of VAT (Value added Tax) increase on Tourism industry of U.K in 2011.

2) Provisional Working Title:

The tourism generates a major contribution to UK economy. It generated about £85 billion offering 3.5 percent to national GDP. About two million jobs are maintained by the tourism industry in which 1.4 million are directly employed in the sector with five percent of UK employment. The tourism industry of UK has considerably reduced in the past ten years drastically.

The closing stages of the provisional VAT reduction that took place in January 2010 are expected to negatively influence the UK tourism industry completely. Even though the return of the VAT rate to 17.5% will not have a specific unfavorable effect on lodging providers and tourist attractions, it is bounce to minimize the competitiveness of U.K based on the recent measures collected in Europe. For example, consider France lowered the VAT rate for restaurants from 19.6% to 5.5% and hence Germany proclaimed that it will lessen its VAT rate on lodging from 19% to 7% in January.

Most of the reports suggested that the tax rate is more when compared to other destinations. Hence, it shows that the visitors to U.K face higher prices that generate the country to be less competitive. Moreover, the lower rate would support savings in the sector that could knock over the turn down in the Balance of Payments and add up to £1.6 bn in the first year in the consecutive years. On an average of the assessment of VAT rates in some crest rival tourist destinations such as France, Spain, Italy, the US and Australia revealed that the visitors of U.K will compensate about 10% more on housing and restaurants and 3.5 % extra on appeals and remaining items than they would in any of those substitute countries. A vat rate of 17.5% places the UK tourism sector at an apparent upgrading in the forceful comprehensive tourism market. In this connection, this research aims at evaluating the impact of VAT increase in the tourism industry of U.K in the year 2011.

3) Aims and objectives of the research:

The important aim of this research is to evaluate the impact of VAT (Value added Tax) increase on Tourism industry of U.K in the year 2011.


To understand about the effectiveness of tourism taxation in U.K

To analyze the trends and issues of U.K tourism

To understand the economic effects of changing VAT rates on the U.K tourism industry

To conduct a primary research evaluating the impact of VAT (Value added Tax) increase on Tourism industry in 2011.

To analyze the results of the primary research

4) What is already known about this topic? (Preliminary literature review)

Literature review:

The following literature provides the information collected from secondary sources of information say ( articles, journals, various websites, white papers, annual reports, magazines, documents, texts , statistics and so on ) Several author’s views and opinions are considered to draw a conclusion on the existing literature.

The economic evaluation of Tourism:

The authors Dwler and Forsyth (1993) explains that Tourism is viewed as an increasing economic action and it is desirable. The positive influence of the economic proceeding is also required in it. Most of the interested parties inquire to determine the effect of tourism on economic activity. Hence, these interested parties might be policy makers charged with the generation of the policy towards the segment. They may involve promoters of events or policy changes and government treasuries observing spending on tourism ventures or may be local authorities.

Similarly, the authors Fletcher (1994), Frechtling (1999), Crompton Lee and Shuster (2001), Tyrell and Johnson (2001) illustrates that a predominant method is employed for analyzing the economic impact of the tourism depending on the input and output analysis. Consequently, the authors Wanhill, west, Gamage (2001) says that an input –output model is used to evaluate the change in the question.

ii) Effectiveness of Tourism Taxation in U.K:

The authors Ramesh Durbarry and Thea Sinclair illustrates that tourism in United Kingdom is considered as a chief source of revenue, service and foreign exchange receipts. Its effects also fall over to remaining divisions of the economy. But, the tourism businesses in U.K underwent plenty of issues in the present days. This imitated major decline in the shares of the world tourism market and decline in the intensity of the valid revenue for every visit for most of the UK’s prominent tourism markets. As a result, the level of the price competitiveness on tourism receipts provides some concerns specially. Tourism taxation is a significant resource of measuring price competiveness in the economy. However, tourism makes an imperative payment to the economy. Let us check those points one by one:

Tourism and day visitors offered about 5 percent of GDP (gross Domestic product) over £ total of 61 billion in the year 1999.

Number of the people working in the tourism businesses of 125,000 are about 1.78 billion

It is also considered as the largest invisible export of UK

The uppermost traveler appearances are from USA, France and Germany

According to Deloitte report, it is stated that the contribution of tourism to UK economy offers five per cent of the national GDP and seven percent of employment. This is the situation before ten years ago. Hence it can be concluded that the tourism industry of UK economy considerably reduced in the past ten years. Meanwhile, there are many issues that influence the country’s international competitiveness and it is also appropriate to consider the time of the raise in the rate of VAT on tourism services in the UK. Vat has been augmented from eight to 15 percent in the year 1980 to 1981 and to 17.5 percent in the year 1991.

The following fig shows the U.K’s Tourism balance from 1982-2006.

iii) Trends and issues of U.K tourism:

The UK tourism industry suffered two important issues in the year 2010 for sustaining employment and making sustainable economic development. Hence, it is needed that the government important that the new government recognize and boost the industries that are capable to tackle these problems.

The attributes such as labor intensive, low barriers of entry and high demand are suited for assisting the current economic and employment problems.

According to UK labour force survey, 2008, it is revealed that UK tourism offers youth employment.

Based on UK Tourism Survey, 2008, it is revealed that it provides regional employment.

In fact, it offers a high return on investment and rapid return on investment.

The UK tourism underwent number of issues. Even though, the sector experienced huge growth rate in getting visitors from overseas, it accompanied considerable issues given below:

Even though, tourist visitors from aboard augmented about the past two decades, declines happened in the late 1990’s

The u.k’s share of international tourism reduced to about 4.5% during the mid 1990s and remained fairly steady thereafter

Reduced the development of the real tourism receipts from overseas

Real tourism receipts per capita per tourist also reduced for most important of the chief UK countries

Rise of the tourism price index for UK than consumer price index

Hence, it can be concluded that the tourism industry in United Kingdom has underwent number of problems, especially in the decline of the share of the world tourism receipts , decline in the price competitiveness and decline in the value of the receipts per each visit of the tourist from most important regions of interest. Hence, this context is against the conversation of the tourism taxation, the price sensitivity and the world wide competiveness of the UK tourism industry that should be measured.

iv) Evaluating the economic effects of changing VAT rates on the U.K tourism industry:

For most of the countries, VAT is treated as an important tax in the tourism industry. The VAT rates in the European economy change across many countries both in hospitality and application of the standard rates. The member countries can install very less rates and after application of such type of rates when they select tourist facilities. Hence, the vat rates are applicable to tourism industry in industries such as accommodation, restaurants, bars and café service and so on. In Europe, merely three states Denmark, Germany and UK yet relate their standard VAT rate to the tourism industry. There appears that to widespread acceptance that reducing taxes on tourism services is advantageous to the countries that have installed reduced rates to the tourism related sectors.

Table to show the VAT rates in the hospitality and the Catering sector in European countries, 1998

Table to show VAT rate in hotels of Europe:

Hence, from the above tables, it can be concluded that a reduction in the rate of VAT in the hospitality and the catering sector may not imply less revenue tom the government of UK. The tax had doubled during the years 1984 to 1993 due to enormous increase in numerous businesses in this segment and in their extent of business. The government earned more revenue despite of lowering the rate. Hence, the simulation results from BTA (1998) also signify that the output of VAT in UK could augment in the context of a decrease in the existing rate of VAT in the hospitality and the catering sector. Hence, it stated that these outcomes reveal that the correlation among the decrease in the rate of VAT and the increase in the tax may not imply a casual relationship.

Furthermore, an econometric model is also considered to understand the VAT effectiveness in the tourism industry of UK, however, this research summarized that an improvement in the price competiveness of the tourism sector in UK could be accomplished with the help of the depreciation of the exchange rate for sterling as well as reducing the rate of VAT by lessening their prices as long as the tourism businesses react to the tax reduction by lessening the prices. Still research is required in this.

Trip advisor poll (2010) revealed that the tax will increase from 17.5 % to 20% on 4th January 2011. It will influence both the costs of shopping and accommodation, tourist attractions and even car hire charges. This makes UK very expensive to nearly a quarter (24%) of European respondents. From the research, it is revealed that a quarter believe that the VAT augment will generate British holidays unaffordable. Mean while, further quarters (26%) are yet undecided whether the tax hikes will deter them from holidaying in UK next year 2011. 24% of the Britons claim that VAT increase could make domestic holidays very costlier in the year 2011.

Emma O’ Boyle also stated that UK is considered as one of the Europe’s most famous holiday destinations and regarded as a world class shopping hub. Due to the VAT increase, the outstanding travel deals in 2011 of British tourism industry should work hard to be viewed as striking and cutthroat celebration alternative.


5) Why is this work important? (What contribution to knowledge / originality is involved?)

This research project provides number of benefits to understand about the effectiveness of the tourism taxation in U.K. In depth evaluation of the thesis makes an individual to know about the economic effects of changing VAT rates on the U.K tourism industry.

As a result, this project will be helpful to enhance knowledge in taxation, acquiring new skills, understanding ability, decision making skills and time management skills. In this manner, this project leaves a lot of scope for future researches also.

6) How will this work be conducted? (Methodology & sources of data)

Research methodology:

Research Methodology is used to realize the concept of the project. By the research method one can know the products of analysis and also the total process of the project. Various research methods are explained by the researcher in the research methodology to find the aims and objectives of the research. For completing the project effectively a variety of research methods are discussed. For collecting the data that helps in completing the project successfully Primary research and secondary research methods are used. The data is analyzed and then results are made after analyzing the collected data. Some of the research methods are commonly used for any research process. A research work is not merely a work plan but it provides the data that has to be completed. Hence, it can be said that work plan will explain the flow from the project’s research design. Moreover, the function of the research design is to facilitate that the evidence acquired permits the user to reply the initial question as definitely as likely. Research design handles with a logical problem but not a logical problem. (Yin, 1989: 29)

The various research processes are

Experiment methods

Survey methods

Observation methods

Case study method

Literature review

The research methods used for the successful completion of this project are Qualitative research and quantitative research method.

Qualitative Research Method:

[Marshall PA. 2003]Qualitative research method is a type of logical research. The approach of gathering in–depth information during questioning the participants is done in the Qualitative Research. Qualitative research methods are more flexible when compared to quantitative research methods. The indefinable factors can be recognized by the qualitative research methods. Participant research, in-depth interviews and focus groups are the three types of qualitative research methods. The participant observation is used for collecting the data based on the behaviors. To obtain the group data, focus groups are used. For collecting individual data in depth interviews are used. Qualitative research contains very smaller sample size. In the qualitative research mainly the interviews and group discussions are carried out. In this type of research the customer response forms, information or media clips are provided.

This was generally conducted to observe and query the activities of the different groups in the present world. The scientific research is considered as the qualitative method. In the present event study, this research provides the higher inspection and survey related areas. This qualitative research offers the in depth information on the research and various issues present in the research, several generating ideas, and finally the conclusions are drawn from the possible results of the study.

Qualitative research is a special kind of scientific research. It contains the investigation that:

Seeks answers to a question

Methodically, it employs a predefined group of procedures to reply the question

It gathers evidence

It also produces proof that were not determined in advance

It also produces the findings that are suitable beyond the immediate boundaries of the research study. A qualitative interview technique is dissimilar from daily conversation in the following ways. First it is a line of investigation tool and a good interviewer must prepare questions in advance, and later analyze and report results. (Rubin & Rubin, 1995, p.2) (Potter,W. 1996) (William Badke, 2008), (Fetterman, D. 1988)

Merits of Qualitative research:

It helps in building new theories

It uses subjective information

Explore new areas of research

The questions which are complex to evaluate in the quantitative methods can be examined by the qualitative research method

Demerits of qualitative research:

1) It is expensive

2) Time consuming process

3) The information gathered is limited to questionnaires and interviews.

Primary research:

As a part of the primary data, interviews are conducted with the government officials, higher officials of tourism department and finance department in order to predict conclusion on the impact on the VAT increase in tourism industry of U.K in 2011.

Secondary research:

As a part of the secondary research, number of articles, journals, various websites, white papers, survey reports, news papers, magazines, texts, documents and so on is referred in order to draw a conclusion on the economic effects of changing VAT rates on the U.K tourism industry and various trends and issues in it.

Both primary (interview sessions) and secondary research (literature review) are sources of information collection.

Sampling will be decided based on their availability.

7) What are the anticipated outcomes?

A literature survey comparing various author’s views and opinions of plenty of articles, journals, magazines, different websites, texts, and documents in order to draw a conclusion from it

Analysis results of the primary research

Probable recommendations for the research by considering the results acquired from the primary and secondary sources

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Tourism is where people travel to visit places, typically as part of a holiday or trip. People will often travel to places of interest and beauty for leisure purposes, whilst travel for business can also be classed as tourism.

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