The Budget 2024 beyond the headlines.
I paused for 48 hours to digest what the headline of spring budget says and then to consider what the key measures might actually mean for tourism. The two are clearly linked but not necessarily always the same.
1. The main headline measure effecting tourism and indeed everything else, the 2% cut on both employed and self-employed National Insurance (NI) payments must be welcomed. Coming into effect from 6 April it, together with the 2% gifted in the Autumn Statement that started to be reflected in January’s wage packets, will now leave the average worker on a £36k salary £900 better off by the end of 2024/25 tax year, or an additional £75 a month, of hopefully, disposable income. The headline as much as the reality may help boost consumer confidence. The confidence to dispose of income on “non-essential activities” like trips to the pub, meals or of days out, short breaks away or holidays can be as, if not more, important to discretionary spending, than the reality of having the spare cash to do it.
That said in a market place, as diverse as that of domestic tourism and across all parts of the ubiquitous visitor economy the “average worker” isn’t everyone’s average customer. The range of individual incomes and circumstances involved across the UK’s working and retired (not subjected to NI) population are so diverse that it is difficult to be overly optimistic about the prospects for universally positive impacts from this measure and, especially, for marked improvement on 2023 performance, in time to impact on the fast approach 2024 shoulder and looming main summer seasons. No real change there then.
Although, any financial improvement is welcome, for many it will merely ease the increasing general local and national tax burden, cost of living, energy and interest rate pressures and not necessarily significantly boost the all-important discretionary, disposable income. For those with disposable income to spend on tourism and within the visitor economy more generally and there are of course still many of them, the elephant in the room remains the propensity and proportion to direct much of that spending overseas, as opposed to the clear alternative of retaining more of it at home within the UK. Domestic outbound tourism has recovered quicker and further than the rest of domestic tourism and depending on who you believe, is set to continue to do so in 2024 and beyond.
It is an elephant that, at least in the offices and corridors of Westminster Government, still seems to be studiously ignored. Albeit in their defence ignored possible because it is just too big, too thick skinned and potential too powerful to be safely and easily addressed? If you are unwilling or can’t reasonably be expected to address the elephant directly, that shouldn’t preclude you from indirectly addressing the obvious, to us at least, domestic and domestic outbound imbalances through more targeted fiscal and policy support for domestic tourism’s development and promotion. Yet such support remains stubbornly viewed by Treasury and, thus by successive Governments, as an internal, general (white goods to days out) UK economic displacement activity and therefore seldom if ever worthy of serious industry specific intervention. We can but try to change ingrained attitudes especially during a potentially forthcoming period of fresh faces and differing priorities.
2. On the business front an increase of £5k from £85k to £90k on VAT registration threshold and from £83k to £88k for voluntary deregistration, both effective from 1 April will be helpful for those businesses operating at or near the VAT or no VAT margins. Although welcome, changes to VAT thresholds and the desire or need to remain as close below, as is safely possible, usually to enjoy a sales price benefit, at the loss of an input cost advantage, is often a more complex juggling act than it is popularly assumed.
For many of those deliberately operating at the margins or now unintentionally approaching them, largely due to recent unavoidable inflationary pressures, it won’t necessarily allow them to undertake £5k worth of additional sales as some suggest but rather it may allow them to remain trading at the same level for a while longer and do so below the VAT threshold, despite the ever-increased cost of everything they buy and sell. Obviously, there will be many exceptions to that general rule. Some (who currently knows how many?) will be encouraged or enabled to undertake c £5k more additional sales without the added cost and administrative burden of charging and accounting for VAT. Meanwhile, I suspect the vast majority of businesses both very small and all of the bigger businesses operating well below or above the threshold will be totally unmoved by it. Some of those paying VAT will of course continue to resent the 20% price advantage offered to their sometime only marginally smaller competitors. You can’t please everybody.
3. Furnished Holiday Let (FHL), tax concessions that have been in place in some form since the 1980’s, abolished in 2009 and reinstated in 2011 are now to be removed again with effect from April 2025. The rules essential allow mortgage interest costs, capital investment and/or any losses made on an individual FHL property in the UK or abroad to be offset against tax and give far more generous capital gains tax benefits on the property’s sale or those transferred by gifting. There are clear but not necessarily easily enforced rules about what constitutes an FHL and when. The Government main stated reason for acting is apparently to close a tax loophole that has by accident or intent encouraged a significant shift, particularly in many popular tourist destinations from long term residential to short term holiday letting, with all the now increasingly familiar attendant social, economic, employment and staffing issues that this can exacerbate. (my interpretation and not necessarily Governments).
The details of the new rules are yet to be issued (and consulted upon?). So, it is not yet absolutely clear, for example whether the capital gains benefits will tail off or simply cease (probably the latter) or whether there will be any clawback of any previous benefit (unlikely). There are two distinct ends to the tourism spectrum regarding this measure. The, “this could significantly reduce the supply of holiday accommodation to the detriment of the destinations involved and to UK tourism as a whole”. And at the other end of the scale the, “this has sadly come a bit too late but it might overtime redress the chronic shortage of affordable (?) long term rented accommodation needed in tourism hotspots, indeed in most destination of any significance, in order to sustain the living, breathing, working communities that people on the whole actually seek to visit in the first place”. I tend to lean more towards the latter.
The true position probably lies somewhere in between the two and I feel should include somewhere within the midground the justifiable concern from some quarters about tax incentivised distortion of the established serviced and non-serviced accommodation sector and its market. While there may be a flurry of attempted property sales before the April 2025, I can’t really see any of the potential positives or negatives developing too quickly, or coming to a head much before the mid to end of the next Parliament. Nor do I see any of the main party contenders for the next Westminster Government reversing the proposal before it is implemented next April or anytime soon thereafter, despite any of the inevitable lobbying there is now likely to be for this.
I am currently unconvinced about the impact on individual single property owners. It is truly unfortunate that the benefits that they enjoyed are being removed but will it really be enough to force the sale and abandonment of their property, or enough on its own to force their conversion to the now equally attractive or is it equally less attractive long term let market? I do have much greater concerns for “proper businesses” based on larger holdings of furnished holiday lets. The cumulative removal of the tax concession across a wider portfolio of properties could easily destabilise even the most established of business models. I am currently seeking more informed opinion on this.
On balance I think the true impact of the measure will be to remove the ongoing financial incentive to buy up owner occupier and long term lets in holiday areas with the express dual intent of turning them in to a potential lucrative furnished holiday letting and as tax efficient capital investment. I would question whether in honey pot locations at least, that the horse hasn’t already long since bolted, with much of what can be bought up for FHL purposes already having been bought? Regardless, the Government are doing precisely what they say they intend to do which is to remove a tax incentivised distortion in the housing market, a distortion that happens to impact directly on tourism and indirectly on many tourism destinations.
Certainly, in terms of destination management, some if not many may say it was a great pity they didn’t act much sooner when the issues were first identified and before much of the damage was already done. Conversely, there are still some popular tourism areas, some coastal towns in particular, where the purchase specifically of some rundown poor-quality accommodation and its redevelopment into quality FHL would remain beneficial. FHL rules may have helped on occasion with the process of “gentrification” with some seaside resorts but there are probably far better and more effective ways of doing it. Removing the distortion in the housing market is an important first step, more difficult and frequently overlooked are the subsequent steps needed to manage both the intended and unintended consequence that then arise.
If the Government are serious about correcting a distorted housing market, then they also need to implement the long promised, now agreed but as yet unimplemented abolition of no-fault evictions. It is not a budget related matter but it would be remise not to remind members that it is a combination of the FHL rules that incentives purchase of owner or rented property and of parallel no fault eviction rules that then allow the eviction of perfectly good local tenants, that has done so much of the damage to local communities in a relatively short period of time and not just one or other in isolation.
4. Other measures include: a one-off 7 to 11% higher increase to take account of elevated rates of inflation applied to APD on long-haul business and first-class travel from April 2025. Economy flights APD will rise at forecasted RPI with domestic and international short-haul frozen. The freeze on alcohol duty is extended for a further 6 months until February 2025. Instead of increasing by RPI fuel duty has been frozen yet again while the 5p tax cut a litre introduced in 2022 remains in place for a further year. Any further increase in both fuel or alcohol duty would have had a demonstrable impact on domestic tourism and the wider visitor economy.
5. Not in the budget but as requested by the Chancellor in the Office of Budget Responsibilities (OBR) pre budget economic and fiscal outlook is the OBR’s reassessment of the rational for VAT free shopping, or VAT Res as it called in Treasury terms. Not the easiest or most encouraging of reads the report does upgrade the forecasted benefit of reinstating the VAT refund scheme on luxury good bought by overseas visitors to the UK by including some of the indirect and other associated spending that would arise from each visit but concludes by saying:
“Conclusion On review, our 2020 methodology still appears reasonable, and our costing to have been a central estimate (although one surrounded by considerable uncertainty). We have updated it to account for the impacts of visitors’ spending on non-VAT RES spending, but continue to believe that this measure is unlikely to affect significantly the productive capacity of the economy”.
“We have focused on VAT RES rather than airside shopping because of its greater fiscal costs. Based on our own assessment and from responses received from external stakeholders the behavioural uncertainties around VAT RES are more significant for our forecast than those surrounding airside shopping. But both measures operate via similar channels, and so our main analytical conclusions are also likely to also be relevant for airside shopping”.
I doubt that the reintroduction was ever on the cards for this budget and that the Chancellor was merely bowing to extreme pressure to review the evidence for such a move. Given the comments and content in the OBR’s review I doubt that there is much likelihood of the measure being reintroduced in an Autumn Statement, assuming there is one from this Government before a General Election. Given that the OBR report isn’t offering enthusiastic support for the economic benefits of VAT Res I also doubt the measure is going to be high on the agenda for the first post-election budget of the new party of Government, whoever that might be. That does not mean that some or all sectors of the “tourism industry” shouldn’t continue to lobby for such a change.
Personally, and I stress personally, at this point because I have yet to properly sound out colleagues, I think from a domestic industry perspective at least we would be better off continue to focus all our efforts on the long sought after and briefly granted during the covid pandemic, reduction in VAT on all tourism services. The benefits of a general VAT reduction would fall to all businesses and all locations and not simply to those in a particular market, often in specific locations. Views please.
You can access the full OBR pre budget document and the section on VAT Res (at para 342 page 71 through to page 76) at:
6. And finally, if you got this far on matter of budget and budgeting can I raise the issue with you of annual subscriptions? Some members pay British Destinations subscription in the first quarter of the year, other at the beginning of or during the new financial year. I am happy to assist members by taking payment for 2024/25 before 31 March, should that help you. Please contact me ASAP if you wish to consider paying now. Otherwise, I will contact individual members organisation and their main representatives re subscriptions post 1 April.
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