Host 

Philippa Lamb 

Guests 

• Clare Beck, Chair, ICAEW Scotland Board
• Jim Orr, Internal Auditor 
• Rhys Ap Gwilym, Senior Lecturer, Economics, Bangor University 
• Sue Rathmell, Partner, Indirect Tax, MHA 

Transcript

Philippa Lamb: Hello and welcome to Behind the Numbers. I’m Philippa Lamb, and today we’re talking about tourism taxes. Why are they being introduced in some British cities? How useful are they? And what do local people make of them?

Sue Rathmell: Like VAT, you know, it’s a cheap tax to run, and I think that’s one of the other attractions in it.

Rhys Ap Gwilym: When it comes to the acceptability of the tax, the thing that really makes a difference is an understanding of how that revenue is going to be spent.

Philippa Lamb: Last month, Edinburgh City Council published draft proposals for a visitor levy scheme. It’s going to charge visitors 5% of their accommodation costs per night, capped at seven nights. The council is following in the footsteps of Manchester, Poole, Bournemouth and Brighton, all of which brought in their own tourism taxes this year. Now these taxes aren’t new, but they are quite new to the UK. Supporters argue the revenue is needed for regional housing, services and the arts. But a poll of ICAEW members in Scotland revealed a real division of views, with 55% arguing the visitor levy would not be good for the city. So what are the arguments for and against, and what are the likely outcomes?

To get into that we’re joined by two Scottish ICAEW members with differing views on the levy. Clare Beck is chair of IMS [ICAEW Members in Scotland] Network’s board and lives in Edinburgh, and Jim Orr is an internal auditor and also runs a small charity. We’re also joined by Rhys Ap Gwilym, Senior Lecturer in Economics at Bangor University, who is researching tourist taxes, and Sue Rathmell, Indirect Tax Partner at MHA. Hello, everyone. Clare, you are Edinburgh-based. I’m going to start with you. I know you have some reservations about the levy. What are your key concerns?

Clare Beck: My first concern is, is it fair? Are we, by having a percentage based 5%, treating the different businesses fairly? So, for example, hotels already pay significant taxes and rates, and what’s the impact on hospitality in general? If people have to pay a 5% transient visitor levy, will they spend less on other entertainment or cultural visits, or taxis, or any of the other millions of ways you can spend money in Edinburgh? Has anyone considered the impact on hospitality? And thirdly, do Airbnbs contribute disproportionately to the noise about the negative impact of visitors on Edinburgh, and are they suffering the same burden of this tax? So there’s lots of questions that we probably still need to consider. Unintended consequences are often very important.

PL: But the levy, I should say, does apply to Airbnb as well, doesn’t it, equally? And it’s a flat rate across all accommodation providers. Is that right?

CB: It’s a flat rate of 5%. So, for example, the Balmoral hotel would be charging some guests £170 a night for, obviously, the most expensive rooms. Rocco Forte, a fellow ICAEW member, alluded to it in The Scotsman in the summer; he raised some significant concerns about the impact of the transient visitor levy.

PL: So he’s not keen as a hotelier. Jim, I know you’re more relaxed about it. Where do you see the benefits?

Jim Orr: It really originated in an era of falling budgets and a frozen council tax in Edinburgh, and it was seen as a way to get more money to improve the city further. Especially, I think there’s a feeling that the Festival and the culture sector is suffering a lot in Edinburgh, and there’s a hope that some of the money could go into assisting that sector. And also some of the housing pressures that the tourism brings – Airbnb and others – and all the gap sites in Edinburgh now become hotels rather than affordable housing complexes. So there’s a hope that that may be solved as well. And I think it’s more about, in an era of falling budgets, the city has a lot of needs around keeping the streets clean, keeping the cultural sector alive, even things like public toilets. There’s been a programme of closing public toilets because they’re no longer disabled accessible anymore, and visitors and all sorts of people really need these things. So I think it’s seen as an opportunity to keep the city thriving and livable and meeting expenditure that’s needed.

PL: And the projected revenue per annum is about, is it about £50m?

JO: £50m, eventually, in the first year. It’s going to come in, the plan is, for part of a year, and then within a year or two it should be about around £50m.

PL: So you don’t have concerns that it’s going to put tourists off?

JO: Not particularly, no. If I have concerns I would say 5%, perhaps, is a little bit high. But my main concern is, can the City of Edinburgh Council actually spend the money wisely and in a way that’s going to be of value to the city and so people are going to say that they don’t mind paying the money? Because the city council hasn’t always had a fantastic reputation for the way they spend money. There’s a few scandals here and there we could go into, but it’s more about trust.

PL: Are you thinking of the tram, the new tram system, Jim, by any chance?

JO: Yes, that plus multiple others.

PL: So it’s the way that the money might then be administered that’s the concern for you, rather than the fact that they’re levying it?

JO: Yes. I think also, it’s very hard to ringfence any money in any council, because any money you spend on something that’s ringfenced, you’re saving money elsewhere, and you don’t know if that money would have been spent anyway, sort of thing. So I think as long as it’s spent wisely, people are going to be happy with it. And the plans do look reasonably wise. There’s not an awful lot of help going towards the culture sector from the plans. But I’m not entirely sure how easy it would be to spend funds in that direction. There is money going to go into affordable housing or making unviable housing projects work. That’s really welcome, but it’s not really related to the culture sector.

PL: What’s your sense of the response from the business sector, Jim? Did you get the feeling that they’re largely for or against?

JO: There is a significant opposition, and it’s been voiced by the Conservative Party in Scotland – in the council and in the government – but not entirely. There’s an Edinburgh hotels association who were cautiously optimistic. I think they don’t mind too much, as long as they see the benefits, and if they feel that Edinburgh is going to become a more popular and more worth visiting city, then they’d be OK with it. But I think the proof of the pudding is in the eating, as it were, so it hasn’t been entirely negative. But there’s been quite a lot, I think, especially from the smaller-level hoteliers and Airbnb side, of being just negative – it’s the ones that want to cut all costs.

PL: Sue tax is your area. I know you have clients in the hospitality sector. Presumably, you’re not happy?

Sue Rathmell: It’s not so much me, Philippa, as my clients. They’re not happy. What they’re saying to me – and in particular, talking about the golfing sector, which is big in Edinburgh; there’s a number of very prestigious courses in Edinburgh, and especially Americans are very happy to visit Edinburgh and play golf – and what they’re saying to me is that it’s an unfair tax on already very expensive services within Edinburgh. And it puts Scotland at a disadvantage to their main competitor for golf holidays, which is Ireland. And if we widen this a little bit to look at Ireland and other countries within Europe, we can see a massive disparity between what’s been suggested by Edinburgh compared to other countries. And it is higher than most other countries, like, for example, some of the cities within Europe – they charge by night, by person. Sometimes it’s a percentage, sometimes it’s a fixed amount. But I think the main point that I want to make, Philippa, is VAT. So in this country, we have a fairly high rate of VAT at 20% and no reduction for the tourist sector. We did have during COVID – we had a reduced rate of VAT of 5% then 12.5%, and then it went back up to 20%. But across Europe, on the whole, they apply a reduced rate of VAT to accommodation; 25 out of 27 EU countries have a reduced rate of VAT that they apply.

PL: Substantially reduced?

CR: Yes. So, for example, Belgium is 6%; also Portugal, 6%; Germany is 7%; Greece, 13%. So, you know, a lot of them are less than half of what is being charged here in the UK. And the UK government has consistently ignored calls by the tourism sector within the country for a lower rate of VAT, which would help them. And of course, we mustn’t forget that we’re still recovering from the impact of COVID. Hotels couldn’t open. There could be no holidays for long periods of time. Tour operators had a dreadful couple of years just recovering, and now to be hit by an additional tax in Edinburgh – on top of no reduction in the VAT – frankly, I think it’s a mistake.

PL: Is there a real sense then that it’s going to make these cities uncompetitive with mainland Europe?

CR: Yes, I think so. I mean, if I can give you an example, Paris just recently doubled its tourism tax in advance of the Olympics and now, if you’re looking at five-star accommodation, it’s a whopping €10.73 per person per night. But even that, compared to Edinburgh, once you’ve added the VAT on top, you’d be paying €243 for a €200-room in Paris, whereas in Edinburgh you’re paying €252 – so even more expensive than Paris. And Portugal, for example, that same €200-room would cost you €226 when you’ve included VAT and the tourism tax. I think that shows the difference here and how uncompetitive I think Edinburgh is making itself.

PL: Rhys, I know you’ve studied this in depth. Give us your take on this, because these aren’t new, are they? I mean, we’ve had tourism taxes for a long time in various parts of the world – the US, I think, and in Europe?

Rhys Ap Gwilym: Yes. Can I just come back to Sue’s point? First of all, I think she’s absolutely right to highlight VAT. She’s absolutely correct that across Europe we see lots of jurisdictions where the accommodation sector has a lower rate of VAT than the standard rate. But I think it’s important that we caveat that by thinking that it’s not just VAT and tourism taxes that are levied on the accommodation sector; there are also corporate income tax, property tax, employers’ social security contributions. We did a piece of work for the Welsh government on this, looking at the tax system in Wales and a number of comparator economies in the rest of Europe. And when you take all of those taxes in the round, essentially, we analysed what the total tax wedge was – we took an exemplar of a £1m-turnover hotel. So Wales – and you can read across to the rest of the UK, because Wales is pretty similar in terms of its tax system – Wales was in above-average, but wasn’t an outlier. So the overall tax wedge at present is not really out of line. Where Wales and the rest of the UK is an outlier is when it comes to micro enterprises. So coming back to Clare’s point earlier about Airbnbs, well, if somebody owns and manages maybe one or two Airbnbs, chances are that they are going to come in underneath the VAT threshold. If they’re registered for non-domestic rates, they probably get small business rate relief, in which case those micro enterprises are paying, you know, much lower taxes than we see for similar enterprises across the rest of Europe.

PL: I can see Clare nodding, because this plays to the point you’re making Clare that, you know, it disproportionately benefits Airbnb?

CB: Exactly. It disproportionately benefits those micro entities who aren’t subject to VAT – they’re below the limit – and who don’t pay business rates, about which there is a lot of talk, about the need for significant reform in Scotland. And so it’ll disproportionately target our more prestigious accommodation – hotels like the Balmoral in Edinburgh.

PL: But is there an argument that, you know, this all plays into the, you know, entrepreneurial spirit that the government wants to see, to raise productivity, small businesses should be encouraged?

CB: There’s an argument for encouraging small businesses, which should be welcomed, but not disadvantaging the bigger businesses – the five-star luxury hotels; not tying their hands and feet together so they can’t trade profitably. It’s the balance that isn’t quite right. Personally, I think a flat rate per person per room for a couple of euros, a couple of pounds, would have been the better way to go. If we have to stick with the 5% rate which has been passed as law, then perhaps we should consider a lower percentage, which brings it more in line with other countries.

PL: Rhys, tell us a bit more – because you’re the expert on this, I think – on how these schemes have played out in other countries over the long term.

RAP: Tourism taxes are popular. They’re common across the world, particularly in Europe. If we look at the EU nations, 18 out of 27 currently have some form of tourism tax – maybe not across the whole country, but in certain destinations. There’s plenty of them in North America as well, and elsewhere in the world. They don’t always take the form of an over overnight stay tax. So if you go to New Zealand, for example, you’ll pay an arrivals tax, essentially, when you arrive in the airport, and that covers you so only impacts on international visitors. But there are various types of tourism taxes around the world and I guess, you know, there are some commonalities, but they’re also incredibly varied, both in terms of the tax themselves – how those taxes are raised – but also in terms of how the revenues are spent: whether those revenues are hypothecated to particular activities, or whether they just go into the general pot.

PL: But do they tend to stay? I mean, I think the earliest one I saw mentioned was 1910. Have towns and cities introduced them and then thought, “This isn’t working”? Or do they generally persist because the feeling is, actually, this is revenue, this is good?

RAP: OK, so I think that’s the Taxe de Séjour in France you’re talking about, which, yes, has been in place for over a century. Now it’s relatively rare that there’s such long history, but we’ve got examples in the United States that go back to the 1970s, 1980s.

PL: They tend to be quite cheap, don’t they – a dollar a night, that sort of thing?

RAP: I mean, again, there is variety, and you see different rates for different types of accommodations. So if you look in to France, for example, we see examples where differently rated hotels pay different rates for different types of accommodation. So hostels will have a much lower rate, and campsites lower again. So there is variety; sometimes they’re percentage rates, sometimes they’re, you know, pound and pence rates. So a big variety, I think, but you’re right to say that they’re generally modest in scope.

PL: Do you have a sense of what works best? Because, as you say, there’s a multiplicity of ways of doing this. Some of them have been putting it to the test for a long time but I think it’s really popped up in the last 20 years, hasn’t it, certainly in Europe and now increasingly in the UK? But is there a model that seems to work better than others?

RAP: The evidence that we saw is that when it comes to the acceptability of the tax, the thing that really makes a difference is an understanding of how that revenue is going to be spent. And so, unlike most other taxes, there tends to be reasonably high levels of hypothecation that the taxes – tax revenues – are spent specifically to either mitigate externalities or external costs that are caused by the tourism sector, or in order to support the tourism sector; [this could be] either through promotion and marketing – so often these taxes are funding destination management organisations – or else to support tourism infrastructure. That could be on a large scale – so if you look at the tourism tax in Orange County in Florida, it’s been used to fund a multi-billion-pound conference center – but what we tend to see in Europe is things on a more modest scale. So maybe signage, maybe upkeep of facilities, such as public toilets that get used by tourists.

PL: Jim, this goes back to the point you were making. If the money’s going to be raised, it’s what they do with it, isn’t it? And it’s an interesting question, because I think what I saw from the protests in Spain earlier this year, was that it was people who weren’t benefiting directly from the influx of tourists. They just had all the downside, and they weren’t working in hospitality, so they just saw their city overrun. Is there an argument for actually spending the money not as Rhys has just described, on promoting or enabling tourism, but actually on benefiting the people who have nothing to do with that sector, as a kind of compensatory scheme?

JO: Unfortunately, the council is limited by the government’s requirements, which is that the benefit must be towards business and leisure visitors primarily. I mean, I was thinking, while Rhys was speaking, that what visitors really want is a cheap room and this is the opposite, by putting the price up. There are some plans for helping areas of deprivation within the council’s plans, and that’s to be welcomed; but also, even the plans to bring unviable housing back into use – I think there’s a caveat in the council report saying they’re not sure this is allowable within the Act. So a lot of it depends on what the Act lets them do. But I think in principle, I mean, having been optimistic about somehow having the culture sector getting some assistance, I’m not quite sure how that’s going to pan out. It would be great if there could be some more general benefit towards the whole city, because actually the main plank now is for the city to be clean and green and livable. And actually, the city centre is really beautiful and well maintained. The parks are nice, and yes, there could be more toilets and a few things like that, but it is good. But the main priority for the city actually is inequality. And if that could be addressed by the tourist tax, I think that would be really welcome. But there are limitations on what the government can do and what the council will want to do.

PL: And as you say, £50m is not a huge amount of money if you’re talking about projects like that. But I’m wondering, is the legislation too tightly drawn? What do we all think about that?

CB: The legislation specifically talks about a percentage charge basis, and I think it would have been helpful had it allowed for a per night, per person, which has worked so successfully in so many countries for so many years without too much noise. So, for example, in Italy I remember 40 years ago going to Italy and being surprised at the 2,000/3,000 Lira extra being added to your bill. But it’s worked. I think the real noise more recently – for example, in Barcelona – is because people can’t afford to rent their homes. I think that might be what’s behind the real interest in a transient visitor levy. And Edinburgh has addressed channeling some of the funds to housing but as we’ve all recognised, it’s a drop in the ocean; £5m, a figure is earmarked within the expected £50m revenue in the third year – that £5m is earmarked for housing. But that’s it, and perhaps this doesn’t address the accommodation issue.

PL: What do we think, going back to implementation, about – I think recently Sue mentioned – different levels of charge for different sorts of business. Do we think that’s a better way? Should it be a flat rate?

SR: I think it’s fairer if it’s either a separate rate for different grades of accommodation – like, for example, in Edinburgh; campsites are not going to be included in the levy so, you know, if you dare, you could go and camp in Edinburgh rather than staying in a hotel there (I don’t think I’d like that). So that’s a little bit of perhaps fairness there. I mean, for example, Manchester, let’s have a look at Manchester: £1 per room per night is what they’re charging.

PL: That’s a whole different story, isn’t it – much, much cheaper.

SR: Hugely less, isn’t it? They’ve brought in £2.8m in the first year – nothing, really, compared to the £50m expected in Edinburgh. You know, these taxes, generally speaking, they’re never removed. They only ever go up. Personally, I think it should have started at a lower rate at the beginning, with some space to be amended, or even increased over a period of time, once people have accepted that it’s there and have agreed with what it’s being used for.

PL: And presumably that’s the Manchester idea, is it? Because that rate is so low and the revenue generated is so tiny, it sounds barely worth administering. So presuming that the idea is that it will step up and up?

SR: I presume so, yes. I mean, that’s another point, Philippa, you’ve just made there – the administration. Of course, it’s the local businesses that will be doing the administration. They are the ones to collect; they are the ones who will submit a return and make payment of this tax. Like VAT, you know, it’s a cheap tax to run, and I think that’s one of the other attractions in it for the city.

PL: We’ve raised some really interesting points around this, and obviously we don’t know how it’s going to play out in Edinburgh yet. It would be interesting to hear all your thoughts about how you think it could have been done better. What would be a better way of doing this? I’m going to start with Rhys, because you’re the one who’s looked at all the schemes across all these places. What’s your sense of the best model?

RAP: I guess I’m learning a lot about Edinburgh through talking with those who are on the ground there. At the moment, it seems to me that maybe bringing it in more gradually, at a lower rate, would have been a good way to start, so that you could then assess the impact of that as it was rolled out. Now, one of the things that we found when we did our work – and we looked at seven different case studies of tourism taxes around the world, mainly in Europe and North America – what we found was that actually they had been relatively well received, that there wasn’t negative impact in any of those cases, on arrivals, on tourists’ numbers coming in to those destinations. The revenues raised were allowing those destinations to improve their offer and to increase the value added of the tourism sector in those localities.

PL: So it’s a virtuous circle.

RAP: I think it has the potential to be that. Of course, it needs to be well managed. And I guess one of the conclusions that we came to was that although we spoke to a lot of people and got a lot of evidence, what we didn’t find was any systematic assessment of the impact of these taxes in any of the destinations that we looked at. So one of our recommendations to Welsh government is that when this does get implemented in Wales – we’re about 12 months behind Scotland in doing this – but when it does get implemented, it really is important that we carry out some rigorous assessment.

The great thing with this tax, of course, is it varies in Scotland and in Wales by locality, it’s going to be local authorities implementing it in Scotland and in Wales. So we should be able to see a variety of different ways in which the tax is implemented, and to be able to make comparisons across those different areas.

PL: Yes, that would be fascinating. Jim, your thoughts on how this could work better?

JO: Firstly, I would say one thing I do like: the fact that it’s a percentage rather than a flat fee. I don’t think it’s fair to have people in a hostel – one hostel bed with a big crowd – paying the same rate as someone in an expensive hotel. So I do like that side of it. I think they’re limited by the Act, obviously, by what the parliament will let them do. And I feel it’s almost impossible to ringfence anything properly, that any money that’s being raised is going to get spent on core budgets, essentially. And I think that we’ll just have to wait and see what the council report and how well they do, and how well it’s welcomed.

I think, personally, I do like the fact that the council prioritises inequality and things like affordable housing. It’s a real crisis in Edinburgh. It’s like a little London, Edinburgh. There’s so much demand from people who want to come and live here because of the quality of life, etc, and it’s driving people out of the city. So I would really like, in an ideal world, for this levy to be used to have affordable housing for people and transport links to towns near the city, so they can get in and out, because it’s becoming unlivable for too many people and it’s a real sore point. Apart from that, I do obviously, I would say, welcome the levy, and I’m hopeful that it’s going to get used wisely, and that we will look back and say that it was a good decision.

PL: Clare?

CB: It’s been really interesting discussing this. I’ve got a very much clearer idea about how this levy might be introduced in the best way, given where we are. I would absolutely advocate reducing it from 5% to nearer 1%. I think 5% is flawed because it perhaps hasn’t taken into account the high VAT rate, as Sue described, where we charge 20% on hotels, which is very different to Germany, with its under 10%. And also, our hotel rates in Edinburgh are extremely high. It’s a beautiful city. It charges very high rates. So there’s a double whammy going on there, which will make the 5% perhaps appear overly greedy or overly high.

Secondly, echoing Jim’s points about accommodation, this noise, I believe, has come from the lack of affordable housing for people to live and for their children to live in cities. For example, Oban, Edinburgh, Barcelona, it’s the same noise, and not enough of the £50m in year three is perhaps being targeted towards supporting – helping – people have a place to live.

And thirdly, perhaps we also need at the same time to look at Airbnb. Are our 4,000 units in Edinburgh too high, at about 20% of what we’ve got in accommodation offerings to the visitor? So those would be my key suggestions as to how we might best use this transient visitor levy to a good effect.

PL: Really interesting, Clare. Sue, wrap it up for us. Or would you rather it was just gone in its entirety – the whole idea? Are there ways you think you would find it more acceptable – your clients would find it more acceptable?

SR: Funny, you should say that about just getting rid of it! Look, I do feel there are a couple of things I want to say. Firstly, I don’t think it’s for the country’s hospitality sector to bear the burden of bringing in money to help the people who are living in a city. Frankly, it’s a sector that employs a huge number of people. A lot of them are on minimum wage. And I think we should be encouraging our tourism and hospitality sector by not putting in charges like this, and by reducing the VAT level. Personally, I think it’s too soon after COVID to introduce this kind of a charge, I think it’s a mistake. I agree with Clare that it’s far too high; it should be much lower. And I think we should be listening to the businesses in Edinburgh as to what they’re saying and their opposition to such a tax. I think that’s the bottom line, that it is not going to help tourist and hospitality businesses in Edinburgh.

PL: Well, if Rhys has his way, I guess we’ll know, won’t we? Because there’ll be proper research done into the outcomes of all this. Did you have a final point, Rhys? I see you’ve got your hand up.

RAP: I think I was just going to agree with Clare that a lot of the dissatisfaction with the tourist industry that we’ve seen over recent years – and we’ve seen the protests in the Balearics and in Catalonia, two places where they do currently have tourism taxes already in place – [is] because of the growth in Airbnb and that type of accommodation in particular. And maybe, you know, a tourism tax is a bit of a blunt tool to address that particular problem. You know, maybe you need to start thinking about the planning system and other areas of policy if you’re going to attack that particular issue. But I think my great hope when we do get a tourism tax introduced in Wales is that it will mean that there’s a pot of funds there that can be used in order to enable the tourism industry and the host communities to actually come together and find a way of using those revenues in a way that benefits both the sector and the communities who are hosting it.

PL: I think we’re going to have to revisit this in a couple of years, aren’t we, and see how it all actually plays out. But thank you all very much indeed. It was great to have such expertise in the room and such diversity of views.

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