PRE-BUDGET SUBMISSION

to

The Department of Finance

 by

 The Irish Hotels Federation

 October 2001

A path to returned growth

A Path to returned Growth

The Irish tourism and hospitality industry has played a major role in the growth of the Irish economy over the past number of years. In 2000, it is estimated the Government earned revenue of £1.6 billion through taxation of tourism expenditure, of which £1.3 billion came from foreign tourism.

During 2000 alone over 6.3 million overseas visitors were catered for, in addition to the rapidly expanding demand from local domestic market sources.  Overseas tourist visits to Ireland grew by 5% in 2000 – the ninth successive year of growth.

The main source of visitors is the UK, which supplied us with 3.5 million visitors last year, followed by the United States with 1.06 million visitors.  The remainder of visitors came primarily from Europe.  Within continental Europe, France and Germany are the largest contributors to Irish tourism, contributing 200,000 and 172,000 visitors respectively.

Revenue generated from foreign tourism increased from £1.9bn in 1996 to £2.9bn in 2000 and with expenditure from domestic tourism, tourism in total is a £3.7bn industry. Close to 145,000 full and part time jobs are supported by the industry, many in places where tourism is the main if not sole source of economic activity.  In terms of revenue it is estimated that approximately 51 jobs are supported for every million pounds of out of state tourism expenditure and 36 jobs for every million pounds of domestic tourism expenditure.  The growth of the industry has been driven by favourable confluence of key factors such as, availability of investment incentives, increasingly competitive economy, expanding market demand and improved product offer.  However this growth pattern is now seriously at risk.

The recent events in the United States and to a lesser extent the potential outbreak of Foot and Mouth disease have served to eradicate the growth trend.  Action must be taken to kick-start the industry immediately otherwise it will be faced with a long period of recession.  The projected loss this autumn / winter (September – December) from the decrease in American tourists is expected to be in the region of 200,000 visitors, equating to £105 million in revenue.  The effect of this loss is multiplied by the fact that the revenue earned in this period is needed to sustain the hotel reserves throughout the lull period from January to May.  The projected decrease in American visitors of up to 550,000 next year would amount to a loss in revenue of  £265 million equating to a possible loss of just over 13,000 jobs.  These grave statistics highlight the fact that extensive actions are required urgently to tackle the upcoming challenges.

The key issues covered in this document are:

Immediate Response to Decrease in Visitors:

Marketing – Immediate and Ongoing

Cashflow relief for stricken businesses:

Local Authority Rates relief

Competitiveness:

Cost Competitiveness

Taxation Issues

Environment:

Waste Management

Investment in Roads:

National Development Plan

Summary of Recommendations:

1.1 Marketing

1.1.1        Special fund for immediate action

The importance of marketing to the success of the industry cannot be overstated.  In light of the recent events in the United States the necessity for such funding has risen considerably.  The United States supplied us with 1.06 million visitors in 2000.  It is estimated that on average each US visitor to Ireland spends, in addition to their airfare, spends £525, while in the country.  This equates to £557 million pounds in revenue.

From September to December 2000, 250,000 American visitors travelled to Ireland. This represented £125 million of revenue to the industry.  Revenue earned during this period is critical to the industry as the months from January through to the end of April are traditionally slow and the revenues generated prior to then are vital to see the industry through this lull.

As a result of the atrocities of 11 September it is likely that the number of American visitors will be 200,000 less in the last 4 months of this year and it is feared that next year the total number of American visitors could drop to 550,000.  This equates to a loss in revenue of £105m in 2001 and £265m in 2002 and puts at risk over 13,000 jobs.  In the wake of the Gulf War the number of American visitors fell by 90,000 to 350,000 and did not recover to previous levels for three years.

It is essential that there is available an adequate designated marketing budget, in addition to the existing £21m marketing budget of Tourism Ireland Limited, to specifically address the challenges created by these present circumstances.  This fund should only be available to support specific programmes with clearly set demanding performance targets. For example the German market, should be set a demanding growth target, - last year it supplied us with 172,000 holiday visitors out of a total of 62 million foreign holiday trips made by Germans.

The full benefit of this additional spend may not be seen in the coming year but will be vital in the performance over the next three to five years.

An indirect result of the atrocities in the US is that fewer Europeans will be travelling on long haul holidays and will be looking for alternative destinations closer to home.  This is an opportunity, in the short term, to exploit this market.

This exploitation would involve joint schemes between airlines, hotels and the tourism institutions to promote Ireland, and thereby attract more European visitors, through competitive flight and accommodation packages.  In addition to this the domestic market must also be targeted through extensive marketing to attract those that would normally travel abroad, but may now be reluctant to do so.

The IHF recommends double taxation relief on joint marketing schemes, subject to approval by a tourism body such as Tourism Ireland Limited or Bord Fáilte.

The IHF would also recommend an immediate fund of £2.5million to augment the activities of Bord Fáilte in the Irish and British markets during the remainder of 2001 and to provide support to the promotion of special airfares from the US in a sensitive and appropriate manner.

A specific Tourism Recovery Fund of £20million should be put in place to support marketing and promotional activities designed to influence incremental growth over and above the normal national targets.  The success of these initiatives could offset the loss incurred by the expected decrease in American visitors and increase the platform on which to base future growth.

1.1.2        Continuation of National Development Plan funding

The IHF welcomes the allocation of £150 million under the National Development Plan 2000-2006 for tourism marketing.

This is vital to sustain our presence in existing markets, which in the case of the US may not reap benefits in the short term, but is necessary to ensure tourism returns to growth when Americans regain confidence in overseas travelling. 

• Action 1: The immediate creation of a fund of £2.5 million to support the extensive marketing needed to counteract the decrease in American visitors.
• Action 2: The creation of a special Tourism Recovery Fund of £20 million to finance specific initiatives aimed at incremental and demanding growth targets for our core Tourism markets.
• Action 3: Double tax relief for businesses participating in approved joint marketing initiatives.

2.1 Cashflow relief for stricken businesses

2.1.1 Local Authority Rates Relief

The Minister for Finance should allocate to the Department of the Environment an amount of money to enable local authorities to grant a rebate of 25%, on rates for 2001 where turnover in respect of the last quarter is down not less than 15% on the comparative period in 2000.  A similar relief should apply in respect of the first quarter of 2002 and be allowed as a rebate against 2002 local authority rates.  A similar scheme was introduced, earlier this year, in Northern Ireland to alleviate the impact of Foot and Mouth disease.

3.1 Cost Competitiveness

3.1.1 Level Playing Field – VAT

With greater transparency in European prices, due to the introduction of the Euro, and the growing role of the Internet, transparent competition is becoming common place. The Government must act now to ensure a level playing field with our competitors within the Eurozone.

It is 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 and next to Germany the second highest in the Eurozone.

Our competitiveness is further eroded in the conference and corporate sector when we are the only country in the Eurozone with a VAT rate of over 10% where VAT is not allowed as an input for registered businesses.

Hotel and restaurant costs are a valid and necessary expense for many businesses and yet VAT on such expenses are not allowed as inputs.  Ireland should follow the example of many other EU countries and allow the VAT element of such legitimate business costs as inputs by registered businesses.  Countries that allow such inputs include Austria, Denmark, Germany, Hungary, Finland, Netherlands, Spain, Sweden, Switzerland and UK, all of which are in competition with Ireland.

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 Inspectors of Taxes are taking the view that many registered guesthouses are not deemed as buildings in use “for the purpose of the trade of hotel-keeping”.

Guesthouses, like hotels, cannot, by law, carry on business unless they are registered with Bord Fáilte under the Tourist Traffic Acts.  The regulations necessary to register as a guesthouse are almost as demanding as those for registering a hotel, with the principle difference being no obligation to serve evening meals.  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. 

Furthermore where hotels or guesthouses provide accommodation for their staff members those buildings should be eligible for Capital Allowances in the same manner notwithstanding that the physical building may not be adjacent to the hotel.

·        Action 1: 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 and thereby entitle them to Capital Allowances.

·        Action 2: Introduce a provision to extent Capital Allowances to staff accommodation.

3.1.3 Childcare

The IHF welcomed the inclusion in the Finance Act 2000 of 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 available if the employer wholly or partially is responsible for financing and managing the service.  For small 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.

 We would recommend that any expenditure incurred by an employer to a registered child minder, up to a maximum of £4.000 p.a. per employee’s child should be allowable as a deduction from the employer’s profits and not subject to income tax (BIK) in the hands of the employee.

•  Action 1: Allow employer payments, up to £4,000 p.a. per child, to a registered childcare provider against profits, with no income tax charge to the employee.

3.1.4 Taxation

The future growth and development of the Irish hotel and guesthouse industry will involve significant changes of ownership, restructuring and rationalization. These developments will take the form of the following:

§         The transfer of properties within families from one generation to another.

§         The disposal of properties for cash or in exchange for shares in other operating companies.

§         Amalgamations of groups of hotels and leasing properties to management companies.

Many of the developments will benefit the Irish hotel industry quite considerably.

Enabling the ease of change of ownership is good for the industry as it introduces more liquidity to hotel investment, facilitates the introduction of new capital and the introduction of new and or younger operators.  At present there are a number of financial impediments to the transfer of hotel ownership causing serious problems for Hoteliers who wish to retire.

The CGT provisions through S.600 TCA 1997 recognises the importance of this transition by granting relief from Capital Gains Tax where all the assets of the business, other than cash, are being transferred to a company.  However no relief is provided from Stamp Duty where incorporation is concerned and the charge to Stamp Duty on the value of land and buildings and possibly on goodwill being transferred to the company prevents hotel owners from incorporating where commercial concerns would normally encourage them to do so.

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.

S.598 TCA 1997 provides a measure of relief where an individual disposes of “chargeable business assets” on “retirement”.  The relief applies where the consideration for the asset does not exceed IR£375,000 adjusted from IR£250,000 by the FA 2000.  A measure of marginal relief is also provided.

It is interesting that where chargeable business assets are disposed of by a qualifying individual within his family that the limit of IR£375,000 does not apply.

The IHF is of the opinion that this relief is of little use to members of the Federation because of the current value of even the smallest hotel or guesthouse would be in excess of IR£2 million, which in effect means that the relief cannot be availed of.

The IHF believes that the claw back provisions, as presently structured, will act as a brake on the development of the hotel industry and will hinder its development over time.  To aid in the process of transferring the business, rollover relief should be available for up to £1.5 million where it is invested in a pension fund for the benefit of the person retiring or his or her dependents. 

These problems can be overcome by a combination of the following actions:

4.1 Environment

4.1.1 Waste Management

The IHF would recommend a reduction in local authority rates payable by Hoteliers who participate in approved waste recycling / recovery programmes.

In 1998, 80 million tonnes of solid waste was produced in Ireland from all sectors.  The municipal and industrial sectors are estimated to have produced over 15m tonnes of waste in 1995.

The policy statement (Department of Environment’s Waste Policy statement 1998) “Waste management – Changing our ways” sets out targets, which include the following:

(1)    A diversion of 50% of overall household waste away from landfill.

(2)    A minimum of 65% reduction in biodegradable waste consigned to landfill.

(3)    Recycling of 35% of municipal waste.

(4)    Recycling at least 50% of C&D waste within a five year period, with a progressive increase to at least 85% over fifteen years.

(5)    An 80% reduction in methane emissions from landfill, which will make a useful contribution to meeting Irelands international obligations.

(6)   Rationalisation of municipal waste landfills, with progressive and sustained reductions in numbers, leading to an integrated network of some 20 state of the art facilities incorporating energy recovery and high standards of environmental protection.

It is vital that alternatives are found to landfill and waste generated from the hotel industry is no exception.  Incentives must be offered to encourage waste reduction and recycling by hotel and guesthouse owners.

In addition incentives should be offered to Hoteliers to purchase their own waste treatment equipment, thus encouraging the safe environmentally friendly treatment of waste.  This assistance could be in the form of “free depreciation”, giving hoteliers 100% allowances in the first year on any expenditure on approved waste management equipment e.g., compactors, composters, special storage bins etc.  All of these would greatly aid the facilitation of not only waste reduction but also waste recycling.

• Action 1: Reduction in local authority rates payable by hotels and guesthouses who participate in approved recovery / recycling programmes.
• Action 2: The provision of “free depreciation” on all waste management equipment purchased by hotels and guesthouses.       

5.1 Investment in Roads

Efficient access is essential for tourism success.  Roads play a particularly important role in the provision of access to the more peripheral areas, of Ireland, that rely heavily on the tourism industry.

The IHF believes that most tourist centres should be within 2 to 2.5 hours of an international airport or car ferry port and that the improvement of the road network as set out in the National Development Plan is essential to achieve this objective.

Good quality roads are essential to ensure that tourists can quickly travel from their access point, mainly on the east coast to the south, south west, west and north west.  These regions, in recent years, are not experiencing the same level of growth in visitor numbers as the east coast with inadequate access a major factor in this uneven distribution of tourist numbers.

In 1997 Dingle Chamber of Commerce found that only 2% to 3% of visitors to Kerry travelled via the County’s airport while a massive 88% travelled to Kerry from Dublin.  A similar study by Galway Chamber of Commerce found that 95% of visitors travelled to Galway by road.

· Action 1: Give priority to delivering on time the road projects set out in the National Development Plan.

· Action 2: Ensure that obstacles to the timely delivery of these targets are identified as early as possible and a solution is found to overcome them.