How will it impact the Highlands’ visitor economy?

The UK taxes visitors heavily. On the plus side, the Government gains substantial revenues from visitors to popular areas like the Highlands. The downside is that this puts the tourism sector here at a disadvantage compared to other countries we compete with for visitors.

 

In the UK, visitors currently pay nearly £17 in tax for every £100 of accommodation expenditure. In France, Spain, and Italy, it’s closer to £9. A 5% Visitor Levy would push the Highlands to close to £22 in tax extracted for every £100 spent.

 

Higher tax rates translate directly to higher prices. We’d go from an expensive place to visit to a very expensive place to visit. The result will be a reduction in visitor numbers to the area, particularly during periods when operators aren’t at full capacity, and in the Highlands, that means most of the year.

 

In addition to higher prices, a substantial additional administrative cost will fall on the operator. I’ve not seen an estimate of this cost, but it will likely be significantly higher than the estimated £550,000 it will cost the council to administer levy collection.

 

Operators are also liable for collecting the levy from the visitor and remitting it to the local authority. If a visitor does not pay or refuses to pay the levy, the operator must pick up the cost. It’s not clear what this additional cost to operators will amount to.

 

The additional costs of administering the levy and covering non-payments will further hamper the competitiveness of the Highland visitor economy.

 

Many operators in the Highlands restrict bookings to keep their turnover below the VAT threshold of £90,000. The levy counts towards the threshold, so further cuts to occupancy rates will be required, and as a result, fewer visitors will visit the area.

 

How will it impact the local economy?

Every other accommodation business in the area will be in the same boat as us. Prices will go up, and expenditure will go down. In year one, the impact will be minimal, but after ten years of lower levels of investment and employment, the sector will be diminished, and any operators currently on the brink will be pushed out of business.

 

Lower levels of investment from the hospitality sector will hit local trades. Reduced visitor numbers to the area will impact restaurants, bars, shops and visitor attractions - the High Street will suffer.

 

A compounding factor will be a drop in investment from new entrants in our area. Multi-site operators looking to expand and invest will prefer sites outside the area covered by the Visitor Levy. Towns close to the boundary will be particularly affected, and the long-term impact of this change on the quality of visitor accommodation in our area will be profound.

 

If the Highlands were a thriving city like Edinburgh, other industries would likely pick up some of the slack when the hospitality sector contracts. But it isn’t, and they won’t. So, it’ll all rest on how the Highland Council spends the additional money extracted from the hospitality sector.

 

How will the money raised by the tax be used?

The Highland Council estimates that the tax will generate £10 million in proceeds and cost £550,000 to administer. £10m is a suspiciously round number, and I think it must be an underestimate. Our guests alone would contribute an additional £180,000 a year in taxes on a 5% levy plus VAT.

 

The stated intention is to spend the money raised by the tax to benefit the visitor economy. For this purpose, the Highland Council plans to set up a Visitor Levy Forum with representatives from communities, businesses, and tourism organisations. The forum will advise on the use of the tax proceeds, with the final decision resting with Strategic Committees or council meetings.

 

What the money will be spent on isn’t clear, but it won’t be vital public services like schools and hospitals because these services are not part of the visitor economy.

 

The forum will likely attract members with a vested interest in a particular outcome, and the funds will be directed accordingly without much accountability. At a time when public finances are stretched, this feels to me like a recipe for wasteful Government spending.

 

Don’t we need the levy to invest in visitor services?

Our Government already taxes visitors highly. We just reinvest less of the tax take in improving our visitor services than other countries do. The poor quality of some of our visitor services isn’t a reasonable justification for raising taxes further.

 

Taxes targeting specific sectors or business operations can benefit the public when they target something undesirable, you want to reduce. Taxes raised from industries that pollute the atmosphere or create disturbance will reduce these outcomes, and money raised can be reinvested in the local communities to benefit all.

 

The levy will target visitors staying in the Highlands. Visitors provide many additional benefits to the area, and targeting them for additional taxes seems wrong. If anything, we’d be a more competitive destination if our Government brought visitor taxes into line with those of other popular tourist destinations.

 

What about the roads?

Road maintenance costs and potholes are often mentioned as justification for the levy. However, road users who visit the Highlands already pay tax on their vehicles and for each mile driven (through fuel duties), so charging them more is unreasonable. Charging visitors who arrive by train a levy to help maintain the roads seems particularly unreasonable.

 

What about wild camping?

Many Highland beauty spots struggle with the number of people wild camping in campervans and motorhomes. Some see the levy as a tool to help resolve this issue.

 

The problem is, wild campers will be exempt from the levy as there is no practical way to charge them. So, the levy will push up the cost of staying in a campsite and incentivise more of wild camping, rather than less.

 

There have also been calls to invest the proceeds of the levy in providing services for people wild camping. I don’t think it’s reasonable to charge visitors staying in campsites additional tax to fund services for wild campers.

 

Also, providing better services for wild campers will just lead to more of it, creating other issues and requirements for additional services.

 

I think we’d be better off incentivising campervans and motorcaravans to stay on campsites.

 

Can the levy help with the housing shortage?

Some see the visitor levy as a tool to raise income from the growing number of private holiday lets in the area.

 

This would compensate for the drop in affordable housing available due to landlords converting their properties from private residential tenancies to holiday accommodation.

 

I agree that there is a shortage of affordable local housing in the Highlands. We struggle with this, too. But, if anything, I think the visitor levy will make matters worse.

 

Many holiday lets fall below the threshold for VAT and Business Rates. Because of this, guests who stay in a larger business like a hotel will, on average, pay substantially more in tax than those who stay in a private holiday let.

 

VAT is also charged on the levy, so its introduction will further increase the burden on VAT-registered businesses. Accommodation providers like hotels will, on average, see a larger tax increase than holiday lets, so they will become relatively more expensive. If anything, the Government should look for ways to narrow this gap.

 

Ultimately, the growth in the private holiday let sector is due to lax planning legislation on the conversion of domestic residential properties to commercial holiday lets combined with a tax system that strongly incentivises the conversion of private residential tenancies to holiday accommodation.

 

A tax that specifically incentivises the conversion of residential properties from holiday accommodation to tenancies will help with this. A tax on the accommodation sector as a whole, will not.

 

Timing of the change

Other than during Covid, it’s hard to think of a worse time to introduce a new tax on the hospitality sector in the Highlands. Visitor numbers in the area are declining, and the last UK government budget was particularly damaging for our industry.

 

The recent budget’s changes to employers’ national insurance contributions represent a tax increase for all UK employers, but the impact is greater on businesses with a large seasonal or part-time contingent.

 

This is due to the substantial drop in the threshold above which the tax is due (£9,100 earnings to £5,000). We estimate the changes will increase our employer’s National Insurance tax contribution from around £215,000 to £300,000. Other local businesses will also struggle with this tax increase.

 

The removal of Business Property Relief (BPR), also announced in the last budget, will have a dramatic impact on family-owned businesses. Upon death, the transfer of shareholdings in a family business will now be taxed, whereas before the change, no tax was due. As things stand, this could hit us with a tax bill of around £1m and many other local, family-owned businesses will now have similar quandaries.

 

Economic Impact Assessment

I’m struggling to find credible research and analysis on how the new tax will impact the Highland economy. This is badly needed. The characteristics of the, largely rural, Highland region are quite distinct from cities like Barcelona and Amsterdam, which are frequently used as examples to emulate.

 

There is a good case for introducing a visitor levy in regions that are simply looking to reduce visitor numbers. Historic cities that have year-round tourist trade but want to avoid over-development and housing shortages could benefit from a levy.

 

In the rural Highlands, we suffer from a lack of visitors. Most businesses, including those used by locals, have to close or scale back operations for several months from late Autumn to early Spring.

 

We’re left with a short window of opportunity over the summer months to make enough of a return to keep us going over the lean winter months. A drop in visitor numbers at any time of year will be hard to bear.

 

At the national level, efforts to assess the levy’s impact are slight and lack rigour. I’m shocked at how little effort has gone into assessing the levy’s economic impact.

 

For example, in the Integrated Impact Assessment for Visitor Levy in Edinburgh much was made of a comparison with Portugal, which did not see a decline in visitor numbers after introducing the levy. However, this is not a reasonable comparison:

• The Portuguese Government introduced the levy at a rate of €1 per night in 2016. €1 per night is far lower than the proposed rate for regions of Scotland.

• In Portugal, the sales tax on accommodation is 6%. Here, it’s 20%, so visitors are already paying substantially more in taxes and further tax increases will likely have a greater impact on demand.

• The Scottish Visitor Levy uses a different method for calculating the tax based on the percentage of the total stay rather than a nightly basis.

• In Portugal, the levy is not included in the listed price of the accommodation. It’s paid at the time of check-in or check-out. A 5% (+VAT) levy requires charging our customers an extra 6%. We’d need to make this very clear at the time of booking.

• There are countless other differences between the taxation systems and the visitor economies of Portugal and the Highlands.

At the very least, we need an independent economist to model the levy’s impact on visitor numbers and calculate secondary effects on other local businesses, factoring in the characteristics of the Highland economy and hospitality sector.

 

We are far from having a clear understanding of levy’s long-term impact. At the very least, we should hold off on making a decision on introducing the levy until we have this in place.

 

What’s the alternative?

For the reasons above, I think introducing a new tax that specifically targets our area’s accommodation sector will damage the local economy. I don’t think we should introduce the tax without good evidence to the contrary.

 

I’m also sceptical about how efficiently the proceeds from the levy will be spent. How do we measure the effectiveness of the Visitor Levy Forum at advising on how the funds are used?

 

The lack of accountability will make it too easy for the proceeds of the levy to be wasted. Meanwhile, after other recent tax and cost increases, many hospitality businesses are already struggling to reinvest enough to maintain a quality visitor experience.

 

If the intention of the levy is to improve the visitor experience, I think we’d be better off leaving the money in the hands of the hospitality sector. There are too many drawbacks to the introduction of the levy and visitors are already paying enough in tax to fund high quality visitor services.

 

If the intention is to use the proceeds from the levy to invest in public services that benefit locals, we should all bear the burden with a small rise in Council Tax and Business Rates. Increasing the tax take on visitors staying in the Highlands to 26% to fund services for locals is disproportionate and unfair.

 

The Highland Council’s consultation on the levy is open until the end of March 31. You can have your say here: Visitor Levy Consultation.