Pre-Budget Submission for Budget 2001

A new millennium, a new phase of development

As we start a new millennium, tourism has become a major force in our economy, representing 5% of total exports and 6.4% of GNP. Visitors to Ireland have increased from 4.7m in 1996 to over 6m in 1999, almost a 30% increase in the period.
Revenue generated from tourism increased from £1.9bn in 1996 to £2.5bn in 1999 - over a 30% increase in the period, with domestic trips bringing the tourism business to a £3.3bn plus industry.
More significantly however tourism currently provides 135,000 jobs (c247,000 if you include licensed premises, fast food outlets and other catering businesses) employing more than one person out of every twelve in our national workforce.
This major force has been achieved through a number of strategies, including sound investment in product development, international marketing and employee training.
While acknowledging the successes achieved to date, it is important that we do not lose sight of the many new challenges facing the tourism industry as we enter the new millennium. New challenges such as globalisation/ mergers & consortia formation (new marketing strategies), changes in the labour environment (new human resource management strategies) and product development will require new approaches and investment, which must be put in place to ensure that the tourism industry continues to significantly contribute to the Irish economy.

The key issues covered in this document are:

Quality Service through:
People/Labour
Marketing
Product Development

Competitiveness:
Equal playing field
Inflation
Hidden Costs
Programme for Prosperity and Fairness

Summary of recommendations:

 ISSUES  SOLUTIONS
 1.1 HUMAN RESOURCES
  •  1.1.1 Decrease in supply pool.- Increase attraction to workplace from overseas and the home-place.
  • Provision of a detailed, all encompassed National Immigration policy, including the granting of work visas and business permissions -procedures that are simple, speedy and transparent.
  • Grant tax credits for building/ renovating staff accommodation. No BIK charge on accommodation provided.
  • Grant a £2,000 special Homemakers Allowance and a £1,000 PAYE allowance for 3 years following return to the workplace.
  • Grant personal tax allowance on childcare payments to registered providers, up to £4,000 p.a.
  • Allow employer payments, up to £4,000 p.a. per child, to a registered provider against profits, with no income tax charge to the employee.
  • Grant a low income subsidy to support those who would not benefit from tax relief measures on childcare costs incurred.
  • Set up the structure to ensure that recent designated funds for childcare facilities are administered properly.
  •  1.1.2 Change in nature of skills.- Provide additional training requirements due to influx of multinational workforce, technological advancements, cost competitive efficiencies, influx of international hotel operators.
  •  Guarantee continued funding to support CERT's training initiatives beyond 2000.
  • Grant tax credits for approved or pre-defined employer led training.
 1.2 COST COMPETITIVENESS
  •  1.2.1 Level playing field.- Ensure competitiveness in light of Euro, price transparency and globalisation.
  • Reduce VAT rate for Hotels and Restaurants to less than 10%.
  • Allow VAT on Legitimate Business Hotel and Restaurant expenditure as VAT inputs to registered businesses.
  • Introduce a provision to ensure that guesthouses registered under the Tourist Traffic Acts are deemed buildings or structures in use for the purpose of the trade of hotel keeping.
  • 1.2.2 Tackle inflation by capping rising costs, curb increase in hidden costs, e.g. commercial rates.
  • Cap current levels of local authority/commercial rates and curb any future increases in same.
  • Extend the charge of rates to Government Buildings. This could reduce the overall Dublin rate charged by up to 30% and provide additional funding to Dublin Corporation.
  • Include all commercial providers of accommodation in ratable premises for the purposes of levying local authority rates. Make it compulsory for all commercial accommodation providers to produce a tax clearance certificate annually to registered or listing bodies
  • 1.2.3 Remove or reduce onerous tax charges on SMEs.
  • Increase the rate of indexation applied to both Class 1 CAT exemption and Capital Gains Tax retirement relief thresholds to £1,000,000 and £1,500,000 respectively, to take account of full indexation of the original thresholds set in 1974.
  • Apply the Capital Gains Tax retirement relief threshold amount to the gain rather than the proceeds of the sale.
 1.2 COST COMPETITIVENESS (CONTI)
  • Full exemption from CAT on property transferred between direct generation persons, regardless of whether they are living in the home in the three years prior to transfer, where a business is also carried on in the premises and the property has a valuation less than £5m.
  • Increase in the 90% business rule for CAT exemption purposes to 100% for businesses with a property valuation less than £5m.
 1.3 MARKETING
  • 1.3.1 Support existing, new and future developments - North/South Joint Tourism initiatives.
  • 1.3.2 Confirm commitment in National Development Plan to fund Destination Marketing of Ireland and take immediate action to address concerns for our largest overseas market.
  • 1.3.3 Incentify industry led Marketing
  • Guarantee funding for current and additional future North/South Joint Tourism initiatives, particularly funding towards safeguarding against dilution of past successes, within the Republic, in destination Ireland promotion.
  • In addition to funds pledged under the national Development Plan, create Special fund of £2.5m per annum, for 3 years, to address concerns about the British market for Ireland.
  • Government assistance for the set up of marketing consortia representing SMEs. Provision of tax credits to members who participate in pre-approved consortia.
 1.4 PRODUCT DEVELOPMENT
  • Improve spatial spread and reduce seasonal variations in Tourism by incentifying the provisions of year round activities/ facilities in rural/seasonal locations.
 Support, through funding, the development of a programme for tourism product development. The establishment of a public/private partnership for such development.
  • Maintenance of the unique "Irish tourism" product.
 Provision of funds to local authorities to help enforce current litter legislation.

1.1 Human Resources

Labour Costs, Skills Shortages, Education and Training

Cause Effect
Solution

Cost competitiveness and quality of service are probably the two most critical factors affecting the success of any service business but none more so than the tourism industry.

It is recognized across all sectors that labour shortages and costs are central issues that must be addressed with urgency if competitiveness is to be maintained, especially given the labour intensive nature of many areas within the tourism sector. With changing demographics and the current labour environment, the risk of a reduction in the quality of service is as much a concern.

Competitive advantage in the service sector is achieved through people - the knowledge and skills they invest in delivering service to customers.

Education & training and the increase in labour supply (by attracting females, immigrants and others into the Irish workforce) are undoubtedly critical factors in influencing the future development of the sector.

The causes must be first looked at in determining what the solutions are:

Increase in labour demand : with an increase in the number of tourists or business delegates into Ireland, driving an increase in the number of new establishments (hotels, Guest houses..), the demand for human resources has also increased.

Employment numbers in the tourism industry have risen from 169,837 in 1992 to 246,843 in 1999.

1.1.1 Decrease in available supply pool :

With the influx of multinationals, the continued growth in indigenous start-up companies, among other factors affecting a strong economy, unemployment levels have fallen in the last number of years (from 11.5% in 1996 to 4-5% in 2000).

This has resulted in greater choice (in terms of work type and monetary packages on offer) and has given rise to higher staff turnover in the tourism sector.

The knock-on effect of such a gap in demand and supply is one contributory factor to wage increases, thus hampering cost competitiveness. It is vital that the government address, as a matter of priority, this demand/supply differential.

Barriers to people entering and re-entering the workforce must be reduced.

Immigration: The IHF welcome the Government decision to prepare a national immigration policy. This is a different matter from that of asylum.
On the wider economic and social issue of immigration, the present ad-hoc system benefits neither the interests of Ireland or those of the immigrant. Both will benefit if we take a clear look into the future, and try match the wishes and abilities of those wishing to live in Ireland with the jobs that will be available.

The government estimates that an additional 270,000 jobs will be created in Ireland over the next 6 years. Meanwhile almost every sector of the economy is facing shortages. Effective Government action in increasing female participation in the workplace or attracting early retirees back into the workplace could procure up to 70,000 workers, this will still leave circ 200,000 more jobs.
Therefore the government should also promote measures aimed at enhancing immigration by Irish emigrants, EU and non-EU nationals, particularly in light of similar constraints in Europe (Per a recent issue of The Economist, in order to keep it's working population age stable, Germany would need to import 487,000 migrants a year, France would need 109,000 and the E.U as a whole 1.6m).

It is vital that a proper visa system (simple, speedy and transparent) is put in place for non-EU nationals. Per IBEC, some of the projected 200,000 people required over the next 6 years will bring dependants with them so the inflow will be closer to 350,000.
It is imperative that the impact of this magnitude of influx will have on areas such as housing, education, health services, transport, social welfare etc. are considered. Other considerations are language and training, as identified and addressed under training above.

The issue of racism must also be addressed.

The tourism sector will seek a significant proportion of projected immigrants. The IHF see the provision of staff housing as an essential part of attracting employees to the tourism industry - both for seasonal staff and as an intermediate solution to long term permanent immigrants.

However the number and quality of staff accommodation is currently quite low. The IHF would look to the Government to address this, in terms of encouraging building additional staff accommodation and for renovation of current facilities. Accelerated allowance will not solve the problem. The IHF recommend that 50% of the costs incurred in building/renovating staff accommodation be given as a tax credit, over a 7 year period.

Female participation/childcare facilities: One of the deterrents for females to return to work is the cost and availability of quality childcare facilities. As all sectors are experiencing labour shortages, there is the added problem of labour supply to run newly established childcare facilities.
The IHF welcome the inclusion in the Finance Bill 2000 of a provision for an immediate 100% capital allowance on the construction, refurbishment or conversion of premises for the provision of childcare facilities. Also welcomed is the non appliance of BIK on any provisions made to employees in relation to the provision of childcare services by an employer. However this is only fort-coming if the employer wholly or partially is responsible for financing and managing the service. For smaller to medium size businesses, the number of females requiring these services may not make it viable for an employer to finance a qualifying premises, thus penalising the SME employee.

The IHF recommend that any expenditure incurred by an employer to a registered child minder, up to a maximium of £4,000 p.a per employee's child, should be allowable as a deduction from employer's profits and not be subject to income tax in the hands of the employee.

The IHF also welcome the recent announcement for an additional £40m for the provision of childcare facilities, bringing total commitment to addressing childcare to £290m in the National Development Plan 2000-2006. However, while the provision of quality facilities has been addressed under the above, the Government must not lose sight of the need to make the cost of childcare facilities attractive to mothers providing a viable choice for them to return to work. This will only be achieved through cost reduction, by providing for a childcare allowance to mothers. Per the National Childcare Strategy childcare costs in Ireland are in the region of £44-£71 per week for one child on average.

The IHF recommend a personal tax allowance for childcare payments up to £4,000 p.a.
We also recommend a low income subsidy to support those who would not benefit from tax relief measures. Both subsidy and relief should be given in relation to each child in care.

The IHF would ask the Government to ensure that funds identified for childcare facilities, as outlined above, are administered properly.

In addition to the cost of providing quality childcare facilities, another deterrent factor is the financial and tax incentive for females returning to work. In order to attract females, particularly on a part-time basis, back to the workplace, it would be necessary to provide a tax-free amount equivalent to 9 hours per week at the current statutory minimum wage rate.
To facilitate seasonal employment, the 9 hours per week would represent an average over a year. In effect, participants in the scheme could earn a £2,000 special Homemakers
Allowance plus a £1,000 PAYE Allowance each year with no impact on existing benefits, including medical cards.

This allowance should be available for 3 years following return to work for persons not having been in the paid workforce or in receipt of social welfare benefits for the previous 5 years.

This is not an unrealistic request, bearing in mind that unemployed persons returning to work get additional personal allowances, back to work allowances, with no impact on their social welfare benefits. Employers in this case also get a double taxation relief deduction for PRSI. The Homemaker, on the other hand, has no incentive to return to the workforce even on a part-time basis.

1.1.2 Change in nature of skills:

Ireland has seen a change in demographics and employee profile. With the increase in foreign employees and the increase in immigration, the skill sets on offer are constantly changing. These changes include language & cultural differences and while this brings new additional and welcomed skills, it also brings the possibility of dilution of some of the Irish friendly hospitality greatly required for the continued success of the tourism industry. This is further compounded by the increase in the number of international hotel operators setting up in Ireland.

With increased consumer spending and a rise in the level of consumer sophistication, the expectations in improved and increased choice in hotel and guesthouse facilities had also imposed additional demands on human resources.
This calls for a revised look at training requirements. It is no longer sufficient to primarily fund school leavers as a means for 'feeding the system'. While CERT have provided an increased number of 'on the job' training courses, there will be an even greater demand for retraining of human resources already in the industry (Irish & Foreign), in other sectors moving into the tourism sector or returning to work after a period of absence.

Employer led training will play a critical part in 'on the job' training and the IHF recommend incentives for approved or pre-defined employer led training.

Training also acts as an incentive for retaining staff.

Large international hotel operators will bring with them facilities and resources for in-house training. Irish indigenous and smaller operators will find it increasingly difficult to compete with this.

Rapid technological advances call for additional training and retraining.

While the Irish Hotel Federation welcome the recent provision of an additional fund to CERT (the training body of the tourism sector) for establishing and effecting a paradigm shift in Human Resource Management, we strongly recommend the continuous provision of this and additional funding over and above the recommended once off provision.

CERT receives its allocation, as set out in the National Development Fund each year, and the IHF acknowledge this. The government must make the necessary provisions to ensure that this level of funding and more is sustained.

Lack of appropriate funding will adversely impact the quality of services offered by the tourism industry. Industry led training should be strongly encouraged in conjunction with CERT's initiatives.


1.2 Cost Competitiveness

1.2.1 Level Playing Field - VAT

With the introduction of the Euro, price transparency will increase. To ensure fair competition, the Government should ensure a level playing field.

Also in light of the current environment of growing inflation, it will be vital to ensure that costs are competitive to our European and Non-European counterparts. VAT on hotel accommodation in Ireland is currently at 12.5%, which is the fourth highest in Europe.

Hotel and Restaurant costs are valid and necessary expenses for many businesses and yet VAT on such expenses are not allowed as inputs in arriving at VAT payable/repayable. Ireland should follow the example of many other E.U countries and allow the VAT element of such legitimate business costs as inputs by registered businesses.

Section 268 (d) Taxes Consolidation Act 1997 provides that a building in use "for the purpose of the trade of hotel-keeping" is entitled to Capital Allowances. Serious concern has arisen in relation to the interpretation of what constitutes "for the purpose of the trade of hotel-keeping".

Reports have been received that some Inspector of Taxes are taking the view that many Registered Guesthouses are not being deemed as buildings in use "for the purpose of the trade of hotel-keeping".

Guesthouses, like hotels, cannot, by law, carry on business as such unless they are registered with Bord Failte under the Tourist Traffic Acts. The regulations necessary to register as a guesthouse are almost as demanding as for a hotel, with the principle difference being no obligation to serve evening dinners. Guesthouses and hotels are the
only commercial providers of tourist accommodation, which are subject to Local Authority Rates. Guesthouses must obtain planning permission to carry on their businesses and must comply with fire and hygiene regulations.

Therefore, the IHF calls that the next Finance Act should include a provision that guesthouses registered under the Tourist Traffic Acts be deemed to be buildings or structures in use for the purpose of the trade of hotel-keeping and thereby entitle them to industrial buildings allowances.

1.2.2 Inflation

One of the potential adversities to industry growth is the high rate of inflation currently experienced in Ireland. It reduces competitiveness in an increasingly competitive global environment. Aggregate inflation over the past ten years is 22%.
While the IHF acknowledge the drive by government to reduce the tax burden on both an individual and on business, one cost that has been over-looked is commercial or local authority rates.
While the inflation figure for the ten year period 1991-2000 is 22%, commercial rates in the same period increased by an average of 47% (Per Chamber of Commerce of Ireland 2000 Report 'The Forgotten Business Tax - Commercial Rates'. Total commercial rates collected in 1984 were £144million and has increased to £455m estimated for 2000.

In line with the Chamber of Commerce, the IHF seek the following -

Government Buildings are exempt from local authority rates with the Government making a specified payment to local authorities in lieu of such payments. This specified amount has not been indexed since its inception. Should indexation be applied, the Local Authority coffers would yield twice the specified amounts paid today. In fact if the charge for rates on Government buildings, in Dublin City, were calculated using the same mechanism as for business premises, Dublin Corporation's annual rates receipts could increase by c£40m, thereby enabling a reduction of up to 30% on rates levied to businesses or a combination of rates reduction and the provision of additional funding to Dublin Corporation.

The application of Local Authority rates to only registered accommodation continues to give over 16,000 unregistered commercial providers of tourist accommodation (approved and unapproved B&B premises and short term let apartments and self-catering units) an unfair advantage. The IHF once more calls for a 'level playing field' and for unregistered operators to be included in ratable premises. This would result in additional, much needed, revenues of over £20m for Local Authorities.

1.2.3 Taxation

With regard to many of the smaller run hotels/guesthouses, the untimely death, incapacitation or forced retirement due to increased competition in a fast changing environment, where skills in latest technology developments, marketing and other advancements, can often force families to dispose of the business. Transfer of such family businesses can incur onerous tax liabilities, which need to be addressed.

In many cases the children may not be able to benefit from the business relief or family home exemption. Often where the business ceases, a surviving spouse may not wish to maintain the property and will transfer the private and business premises to a son or daughter. The IHF recommend that transfers, between direct generation persons, of establishments with a private and business element and a property valuation less than £5m, should be exempt from CAT, in line with the exemption between spouses. This is of particular relevance in light of first time buyer difficulties today in buying a private residence.

The increase in the Finance Act 2000, to £300,000, of the Class 1 exemption threshold for Capital Acquisition Tax, although a move in the right direction, falls far short of restoring the indexed value of the original threshold of £150,000 set in 1974. The correct indexation of this would result in a threshold of £1,000,000.

Indexation rates should be set at rates that reflect property market increases, which were 26% in 1999 vs an indexation rate increase of 2%. This would result in a revised threshold of c£1,000,000.

The IHF reiterate their statement to the Minister of Finance following Budget 2000, to bring the threshold in line with a full indexation of the original £150,000 set in 1974.

With reference to CAT and the exemption of same for the transfer of a principle private residence to a family member living in the house for the three years prior to transfer, where a business is also carried on in the premises and the business is transferred with the private element, the three year rule should not apply.

Again the IHF welcomes the increase in the threshold for Capital Gains retirement relief.
However the increased value of £375,000 is totally unrealistic in the context of business valuations in the year 2000. Again if indexation rates applied were equivalent to property price inflation rates the resultant revised threshold would be c.£1,500,000. The IHF recommend a revised threshold of £1,500,000.

Again the IHF reiterate the need to apply this exemption to the gain rather than the proceeds of the sale.

For those small hotel/guesthouse operators, with a property value less than £5m, provision should be made to increase the business relief to 100%.

1.3 Marketing

1.3.1 Continuation of National Development Plan funding

The IHF welcome the allocation under the National Development Plan 2000-2006 for tourism marketing (£150m). This replaces the ERDF funding, which ended in 1999.

The importance of marketing to the success of the industry cannot be overstated.
As access to rural areas improve and the range of facilities throughout Ireland increase eg Conference and leisure facilities, additional marketing and promotion of these and other new developments is critical.

Exciting developments are happening in the business today. The most notable is the formation of a North/South Council following the Good Friday Agreement. Peace and an All-Ireland 'tourist product' should see continued growth in tourism. Marketing will play an enormous part in securing this new growth potential.
The Overseas Tourism & Marketing Initiative (OTMI), a partnership between public and private sectors was set up to address joint North/South tourism initiatives and the IHF welcomes EU and Peace Reconciliation funding towards these initiatives.

While it is anticipated that the overall All Ireland destination tourism market will help grow joint tourism, there is a fear that the success of past in the Republic will be diluted. The IHF ask the Government to provide funding to ensure effective safeguards are in place to avoid dilution of the Republic's past successes.

1.3.2 Special Fund for promotion in Britain

Britain is Ireland's most important market in terms of visitors and revenue. In 1999 visitors from Britain totalled 3.4 million, representing 58% of total overseas visitors. Revenue from British visitors reached £796.9million accounting for 43% of overseas revenue, of which The Exchequer benefits by c£454m.

Britain delivers on all priority themes and objectives identified in the National Development Plan, particularly Yield, Regionality and Seasonality. Britain currently represents 47% of overseas tourism revenue to the BMW region by overseas visitors; 43% of Small Medium Enterprises (guesthouse/B&B) bed-nights by overseas visitors; 56% of visitors arriving in the shoulder & 64% of visitors arriving in the off-peak by overseas visitors.

During 1999, holiday visits to Ireland from Britain fell from 973,000 in 1998 to 959,000, a drop of 1.4% and with a swing from longer holidays to short breaks, the number of nights that British visitors stay in the country reduced by an even greater percentage. This trend has continued into 2000 and is seriously impacting the business of many hotels and guesthouses, particularly those in rural areas or to those that have not benefited from increased corporate activity.

Tourism is highly competitive and depends on a subjective choice by the consumer. The current strength of the pound sterling vis-à-vis other European currencies has rendered hitherto more exotic destinations much more affordable to the British consumer.
The increase in the number of low cost airline services destinations other than Ireland also increases choices and ultimately competition for the Ireland holiday product.

Sustainability is very dependent on focused marketing - gaining an in-depth understanding or our target market will help further refine marketing efforts in Britain.

Reduced buying power of promotional activities, such as advertising, due to a weak Euro and increasing competitive voice in the marketplace, also need to be addressed.

It is proposed that an additional fund of IR£2.5m will be required per year for three years from 2001-2003 in order to arrest the downturn identified during 1999. It is important that action is undertaken now in order to protect our competitive position in our most important market. Activities to be undertaken will endeavour to prevent any possible further decreases in tourism numbers from Britain and include:

1.3.3 Industry Led Marketing

The influx of large International hotel operators are and continue to increase. While bringing many benefits, their ability to invest heavily in marketing overseas makes it less feasible for smaller indigenous operators to compete. Support and assistance in providing a solution such as joint marketing consortia, will be required, particularly in light of globalisation and an up and coming trend for even large operators to join forces for
e-marketing and other initiatives.
As with training, Industry led marketing is a must. The IHF recommend grants to facilitate small organisations to reach global markets by incentifying consortia formation to represent SMEs.

 

· Action 1: The guarantee of Government funding to support both existing marketing needs and future North/South Joint Tourism initiatives, particularly funding towards safeguarding against dilution of past successes, within the Republic, in destination Ireland promotion.

· Action 2: Creation of a Special fund of £2.5m per annum, for 3 years, to address concerns about the British market for Ireland.

· Action 3: Government assistance for the set up of marketing consortia representing SMEs. The IHF recommend tax credits to members who participate in pre-approved consortia.

1.4 Product Development

While some sectors are encouraging a significant investment in R&D (namely the technology industry) and to ensure competitiveness in the face of growing globalisation, an effective development programme should support all services sectors.

The IHF are currently carrying out a Strategic Review of the Hotel & Guesthouse Industry. One of the issues being addressed in this review is the introduction of new products and innovative ideas to the industry. Technology plays a part in this also.

· Action 1: Government support, through funding, for the development of a programme for tourism product development.

One area that has not been addressed to date, is the development of facilities or activities that will attract all year round business, particular to seasonal rural areas.
While the provision of all weather facilities is undoubtedly necessary it is doubtful that the introduction of accelerated capital allowances would incentify fully the solution of the problem.

The IHF propose the introduction of open competitions by Bord Failte for significant all weather facilities in tourist areas. The competition rules would be wide in that any developers in any area can enter the open competition. The main considerations would be based on locations close to a large amount of tourist accommodation and the likelihood of use out of the main tourist season.

The IHF would ask the Government to contribute 20% of the capital cost by way of Grant Aid, allow accelerated capital allowances and offer revenue grants for the first 3-5 years of operation.
The new Public Private Partnership approach to infrastructural development is welcomed. The IHF recommend the establishment, by the Government, of Public Private Partnerships for product development.

· Action 2: Government grants and tax relief for development of 'all year round facilities'. The IHF recommend the establishment, by the Government, of Public Private Partnerships for tourism product development.

With increased tourism numbers and increased immigration into the country, there has been a noticeable increase in the amount of litter in both Dublin and around the country. Local authorities are stating lack of funds as the main reason restricting the enforcement of current litter legislation. The IHF recommend additional funding to local authorities, ring fenced for the administration of litter legislation and to implement recommendations arising from the recent report from the Litter Tax Force set up by the Minister of Environment.

· Action 3: Provision of additional funds to local authorities to help enforce current litter legislation.