Punitive tax regime causes long-term damage to inbound tourism

At a press conference in London at the Grand Connaught Rooms on March 14 at 11:00 am, the European Tour Operators Association (ETOA) will highlight three major problems that affect incoming tourism: tax, visas, and the impact of the Olympic Games.

If you are a company based in Europe trying to sell the UK abroad, you suffer a huge competitive tax disadvantage. Most visitors coming to this country from long-haul markets (such as North America or Asia) buy their holidays through tour operators. In this country, they are taxed under the Tour Operators’ Margin Scheme (TOMS). TOMS is applied to the margin between the cost of the components and the price charged to the consumer. This margin is not profit. It contains everything not directly supplied by another company. All in-house supplies and all staffing are taxed under TOMS, as are agents’ commissions, marketing, sales costs. These expenses are the process of adding value. TOMS is thus a levy on the investment made in order to assemble, sell, and deliver visitors to the UK. For a long-haul operator, it is equivalent to a corporation tax of nearly 700%.

If a company is based outside the European Union (EU), TOMS is not collectable and so not paid. Thus nearly all incoming operators that sell to consumers are now based off-shore. Conversely, as this tax is on “services supplied in the EU,” all non-EU holidays sold in the UK (say, to Turkey or to Florida) are untaxed. Thus TOMS is a tax on exports, and grants tax-free status to our tourism imports. For a UK-based company, it is overwhelmingly more sensible to invest in selling non-European holidays than to try and sell a UK holiday to a visitor. This not a problem to do with the level of VAT, but the way in which it is applied to exports.

We desperately need to attract visitors to this country. But the process of doing so is subjected to a punitive level of taxation. The cumulative impact of this tax has been devastating. Since applying TOMS to tourism exports in 1988, Britain’s tourism balance of payments have declined from being broadly in balance to being £15-20 billion in defecit. Tom Jenkins, Executive Director of ETOA, said: “The Prime Minister has previously talked about making the UK tax competitive. That idea must embrace tourism.

“There should be no VAT on exports which are used abroad. Tourism is an export, but the creation of holidays in the UK for visitors from outside the EU is subject to VAT under TOMS. That is different from every other type of export and it’s clearly disadvantageous to our inbound tourism. This is a massive disincentive for UK-based companies promoting UK holidays.”