CELTH and Decisio use the impact model to calculate VAT increase
CELTH, and Decisio, conducted research on behalf of KHN into the effects of the increase in the VAT rate to 21% for the hotel sector. The general conclusion is that the VAT increase will yield less for the treasury than budgeted, and the effect on the hotel sector will be significant due to reduced turnover, profitability and investment capacity. The social impact is also significant because fewer tourists will stay overnight in (border) regions, which will affect local businesses.
Hotels with few or no business guests in the lower segment will be hit disproportionately hard. They must compete with hotels just across the border in Belgium and Germany, where the VAT rate is considerably lower (6% and 7%). KHN expects that the continued existence of family hotels in the border region will come under pressure and urgently calls on the government to reconsider the VAT increase. “The proposed measure not only affects entrepreneurs but also undermines the quality of life and employment in regions outside the major cities,” KHN writes. The trade association has shared the report on the Finance and Economic Affairs files with members of the House of Representatives.
Impact model
The researchers from CELTH and Decisio used an impact model to determine the effects of the VAT increase:
1. Based on input parameters: the VAT increase, the part that is passed on in the room price and the price elasticity.
2. With which the change in the demand for overnight stays is modelled: with a distinction between different target groups/segments (domestic, foreign, business, tourist)
3. Which results in an effect on spending in the hotel market and tourist sector: and thus, an impact on turnover, profits, employment and VAT payments from the sector.
4. And ‘substitution’ is taken into account: if Dutch tourists spend fewer overnight stays, they spend their money on something else (in the Netherlands), extra spending on VAT is at the expense of spending on other products and services in the Netherlands. Foreign tourists who stay away no longer spend their money in the Netherlands.
5. With which we provide an integrated picture of the impact on hotels, the tourism sector and the Dutch economy.
Effects on the hotel market
After calculating all the effects, the researchers expect the measure to generate 250 million euros in tax revenue, less than the government has budgeted. To collect this 250 million euros in taxes, the Dutch business community will miss out on approximately 400 million euros in turnover, of which 340 for hotels and 120 million for other tourist companies. This is offset by 60 million Dutch tourists who no longer spend their money on a hotel holiday, but elsewhere in the Netherlands. Dutch municipalities will also miss out on 20 million euros in tourist tax. The VAT increase will not affect all hotels equally. The 4- and 5-star segment in the major cities with a large share of business guests will be hit less hard than the budget segment with many tourist guests. The impact will be greatest in the border regions and outside the major cities.
If hotels do not cut their costs, it is expected that the profit margin of hotels will decrease by an average of 35%, but for some hotels, the profitable operation is no longer possible because the profit will almost completely evaporate. When hotels disappear completely from a tourist region, this has a major impact on the quality of life. For every euro that a hotel loses due to a decrease in the number of overnight stays, regional businesses lose approximately 60 cents in income because the hotel also purchases less in the region, and guests do not spend money on transport, outings, catering and retail.
The report ‘Effects of increasing VAT rate for the hotel sector’ (in Dutch) can be downloaded from the KHN website: ‘Effecten verhoging btw-tarief voor de hotelsector’.