This briefing gives a short introduction to the way VAT works, and the significance that EU VAT law has had for setting VAT rates, before discussing the campaign for a lower VAT rate on tourist services, and the introduction of a temporary reduced VAT rate for hospitality, holiday accommodation and attractions which applied from July 2020 to March 2022.
The campaign for VAT relief to support the tourist sector
There has been a long-running campaign by the tourism and hospitality sector for a lower rate of VAT to be set on services supplied to tourists. Proponents have argued that this would allow hotels, restaurants, pubs and visitor attractions to cut prices, boosting sales and employment in this sector, which in turn would generate growth in the wider economy.
The importance of EU VAT law prior to Brexit
European VAT law limits the discretion of any Member State to set lower VAT rates on individual goods and services. There has been dispensation for a lower rate on certain supplies associated with tourism: specifically, hotel accommodation, certain restaurant services, and some types of admission charge, including charges for entry to amusement parks. Several Member States have made use of this dispensation to charge lower rates of VAT – between 5% and 15% – on these supplies. However, in the past both Labour and Coalition Governments took the position that a reduced rate would not be well-targeted nor cost-effective. With the UK having left the EU, EU VAT law no longer represents an obstacle to setting VAT rates.
A temporary reduced rate as part of the Government’s response to Covid-19
In July 2020 the then Chancellor, Rishi Sunak, announced a series of initiatives to boost job creation in the context of the Covid-19 pandemic, including a temporary 5% VAT rate on most tourist and hospitality-related activities. Initially it was anticipated that the 5% rate would apply to supplies made between 15 July 2020 and 12 January 2021. Subsequently the Government retained VAT relief for this sector for a further fourteen months – extending the 5% rate up to 30 September 2021, and then replacing it with a 12.5% rate until 31 March 2022.
Recent calls for an extension of this VAT relief
Since the end of the temporary VAT relief in March 2022 there have been some calls for a reduced rate of VAT to be made permanent. However, ministers have consistently opposed this.
In answer to a PQ in April 2022 the then Financial Secretary to the Treasury, Lucy Frazer, opposed an extension of this relief on the grounds that, “it is appropriate that as restrictions are lifted and demand for goods and services in these sectors increases, the temporary tax reliefs are first reduced, and then removed, in order to rebuild and strengthen the public finances.” In a second written answer at this time the Minister noted that requests for changes to the coverage of VAT “should be viewed in the context of over £50 billion of requests for relief from VAT received since the EU referendum. Such costs would have to be balanced by increased taxes elsewhere, increased borrowing, or reductions in Government spending.”
In answer to a PQ in January 2024 the Financial Secretary Nigel Huddleston reiterated that the Government had “no plans to reduce the rate of VAT paid by hospitality businesses.”
Download the full VAT on tourism and hospitality services report.
Further reading
The Library briefing Tourism: statistics and policy covers domestic and inbound tourism, their recovery following the pandemic, other challenges facing the sector, and government policy.
