Tourism taxation and policy choices in the UK: the impact of high VAT on demand, competitiveness and resilience.

Abstract

Purpose This paper aims to examine how value-added tax (VAT) policy shapes tourism demand, firm resilience and longer-term competitiveness in the UK visitor economy. Using the 2020–2022 reduced-rate episode and the subsequent reversion to the standard 20% rate as a policy lens, it assesses the implications of VAT transmission for future tourism tax design. Design/methodology/approach This study undertakes a structured policy-evidence synthesis, integrating legislative developments, economic theory, national fiscal evidence, firm-level financial indicators, regional tourism data and international comparisons. Evidence is drawn from official and sectoral sources, including HM Treasury, the Office for Budget Responsibility, STEAM-based regional estimates and European benchmarks. Findings The temporary VAT reductions supported short-term stabilisation but were characterised by incomplete and asymmetric price pass-through, with a portion of the relief retained to rebuild liquidity and absorb costs. Following reversion to 20%, the sector exhibits a predominantly value-led recovery in which higher prices partially offset weaker visitor volumes, with uneven regional performance and heightened financial fragility. In a high-cost environment, reinforced by rising labour and property pressures, elevated VAT is associated with weaker demand conditions, increased insolvency risk and reduced international price competitiveness. Comparative evidence indicates the UK is now a relatively high-tax tourism destination, consistent with a widening tourism trade deficit. Practical implications This paper argues for a more strategic approach to tourism taxation. A lower VAT rate for core visitor-economy services, complemented by targeted measures, could support off-peak demand where capacity exists while avoiding incentives that intensify peak pressure. Reinvestment of tourism-related tax receipts into local infrastructure, skills and destination management is critical to strengthening community well-being, sustainability and long-term competitiveness. Originality/value By reframing VAT as a demand-management and resilience instrument rather than merely a revenue tool, this study integrates evidence on price transmission, firm solvency, regional recovery and competitiveness into a single evaluative framework, offering policy guidance for sustainable reform in high-tax tourism economies.