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By: Paz Casal

Value Added Tax (VAT) in the UK rose to its highest level on 4 January 2011 from 17.5% to 20% as a measure from the new Coalition Government to bring an extra £13billion in revenue to cut down the country’s budget deficit.

The change affects any VAT registered business which sells or purchases goods or services that are subject to the standard rate.

With regards to the travel and tourism industry, whilst the VAT is not applicable to flight costs or cruises, VAT will hit accommodation, tourist attractions and car rental the hardest.

The higher rate of Insurance Premium tax has also risen to 20%, whilst the lower rate of Insurance increased from 5% to 6%.

Inbound and domestic tourism effect

January’s VAT increase is expected to have a negative impact on inbound tourism as there are concerns that the rise in tax may deter foreign tourists from travelling to the UK. While the new UK VAT rate may not be high by EU standards, other countries are strengthening their competitiveness by lowering tax rates in an effort to attract tourists and stimulate growth post recession.

France, for example, has lowered its VAT rate to 5.5% on hotels and restaurant meals from a 19.6% tax, and Germany from 19% to 7%, other European countries imposing discounted tax rates include, Hungary, Finland and Belgium.

A new TripAdvisor survey, polling over 3,200 people across Europe, revealed that 24% of respondents thought that the VAT increase will make British holidays unaffordable, while 26% were undecided as to whether the new tax will affect their decision to visit Britain next year.

Also 24% of Britons claim that the VAT rise could make domestic holidays in 2011 too expensive. With British family budgets squeezed by the increase in VAT and high fuel prices, along with unemployment and inflation set to rise, there is concern that domestic tourism might be badly hit in 2011 – a blow to the staycation trend.

However, as well as the potential to deter tourists, the VAT rise is likely to have an effect on travel operators’ overall margins. The extra cost will have to be passed onto tourists, but in some cases they will be absorbed by companies themselves in order to remain competitive. Those companies covering a range of different price points in the market will be better placed to deal with the VAT rise, as well as those in the lower end of the market.

Brits likely to continue travelling

However, with UK VAT not applicable to flights, accommodation or car rental outside of the UK, ABTA has been reminding the British public that the recent rise does not apply to the total cost of an overseas package holiday, as tour operators’ profit margins are subject to VAT, but the rise will only represent a very small, if any, increase in cost to consumers.

Industry experts seem to think that the VAT increase is unlikely to stop people from travelling, but as the cost of living rises it’s more likely to see a shift in consumer choices.

According to Bob Atkinson, Travel Expert at Travelsupermarket.com: “The British will not stop travelling, but as their disposable income will be equal or less than last year’s, we will find travellers trading down or not travelling as often or as long.

People will either go for cheap flight destinations on self-catering accommodation or all inclusive holidays. Hoteliers in Spain and Portugal are already moving away from half board and B&B to get a bigger slice of the market”.

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