Splat the VAT

According to the internet, Jean-Baptiste Colbert, chief minister to Louis XIV, said that the “the art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing”.

Whether or not he said this, Colbert certainly advised the Sun King on being more efficient in his tax strategies, something the king was certainly on board with, having been disturbed by a mob in his palace as a child. Mobs and tax, you see, tend to go together. He went on to tax the aristocracy rather more than his predecessors, but wasn’t overly concerned with the plight of the common man and we all saw how that ended.

France, tax and the end of empires was back in the news this week when the Senate approved plans to subject Airbnb and its chums to VAT, in an attempt to create a level playing field with the hotel sector. There is no guarantee that these plans will become law, but given the country’s strong spine when it comes to matters of sharing platforms, it seems pretty likely.

VAT is a sore spot within the hotel sector. No one is really too sure what it is about other than it’s a consumption tax and consumption certainly takes place in hotels. As those reading in the UK will attest, the campaign to cut VAT in the sector has been running almost as long as there has been a sector to campaign about.

Followers of Europe and how it’s different will note that there are differing levels of VAT in the region, which takes us back to the Senate and how sometimes things are unfair. VAT in the UK has dropped to as low as 5% in the past few years and is now back at 20%, despite, as many in the sector will tell you, pressures being as great as they were during the pandemic.

So, given the state of things, as economists would say, should the hotel sector free itself from VAT entirely? A few Tory leadership races ago, Michael Gove said that he would get rid of VAT entirely and replace it with a “lower, simpler sales tax”.

He wrote: “My economic plan is driven by the need to increase investment, productivity and wages across the country, with a special focus on helping those areas and regions where productivity is lower.

“It would mean reducing the regulations which hold business back, cutting and reforming taxes – such as business rates – which put pressure on small businesses and undermine our high streets, using the opportunity of life outside the EU to look to replace VAT with a lower, simpler, sales tax.”

The experience of the US, which does not have VAT, is that there are local sales taxes which are plenty confusing for all concerned, lead to crazed regional variances and, well, public services are maybe not so great in the US, so let’s not linger on that.

The issue for the hotel sector and VAT is that it hits the end consumer, the one who doesn’t pass it on in the endless VAT marry go round which keeps accountants in abacuses. This is at the core of the endless campaign for VAT to be cut on hotels. Paying more is off putting for guests.

According to UKHospitality, the hospitality sector contributed c.£54bn in gross tax receipts in 2022 (57% was VAT on sales) with £20bn in exports and £7bn in business investment. The nature of hospitality is that it has a significant indirect impact on the economy and including the indirect / induced impact, the organisation estimated that the GVA contribution to the UK economy was £214bn, or c.9% of the total UK economy.

It makes plenty of money for the government and we’re all fans of having nice things, like doctors and schools, but, with travel and tourism recognised by many governments as the future bedrocks of their economy, should they be plucked until they hiss? There is nuance in VAT on sports, leisure, and cultural activities, as there should be. These activities contribute to our physical and mental wellbeing.

Is it too much to suggest that travel does too? Is it time to look for that nuance?

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