VAT: Robin Hood and other problems

The extent of the application of the rise in IVA (VAT) has caught some people on the hop, and it is the recategorisation of businesses and services that will be liable for the general higher rate of 21% that has caught most out. From 1 September, there will be far fewer businesses than at present which will still benefit from the reduced rate (of 10%). In the tourism sector, these are basically hotels and restaurants. More or less everything else will be subject to 21% - clubs and discos, theme parks and attractions, sports facilities (including golf courses), health and beauty.

Value added tax is a highly discriminatory tax. It discriminates against the less well off and it also discriminates against or in favour of different business sectors. They wouldn't thank for me suggesting it, but why should bars and restaurants be treated differently to clubs? In a tourist sense, they are a part of the same thing, the so-called complementary offer, so why penalise one and not the other?

It would be argued that restaurants aren't solely for tourists (though neither are clubs) and that keeping IVA down enables the masses to feed themselves. Well yes, but then the masses can also feed themselves in a different way. By shopping. And IVA rates are either reduced or "super-reduced" for foodstuffs and beverages, with an exception for alcohol which attracts the higher rate, thus leading to the curious situation whereby a drink in a bar has a lower rate of IVA than the same drink that has been bought from a supermarket.

Business associations have not been slow in warning of the dire consequences of the IVA rise. From loss of general competitiveness to tourism taking a hit to hairdressing salons being cut and blown away, everyone is speaking with one voice, which even includes the government; its ministers admit that the IVA rise isn't going to be good for business, but then we all know that Spain's ministers don't have any say in how the economy is run.

Is the IVA rise going to have as harmful an impact on tourism as it is being suggested it might? In one respect, it is unlikely to. Tourism to Mallorca is remarkably durable, even if the level of tourism spend has been less durable. Putting up prices because of higher IVA rates will make this spend lower, but it doesn't follow that tourism itself would fall.

There is some validity in the argument that countries (Portugal, Greece) which have reduced VAT in the tourist sector will benefit at the expense of Mallorca and Spain, but they can benefit only by so much, the benefit being determined by supply. There again, do tourists make decisions based on rates of value added tax in different countries? They do make them based on price, but the price decision is more one of the cost of the package or the flight and the accommodation rather than how much it might cost to enter an attraction. Though tourists are way more savvy in their budgeting (and necessarily so) than was the case in the good old days of worthless pesetas and a bevvy costing a mere ten of these worthless coins, there is also a psychology of purchasing by the unit; hence, x number of meals out or y number of excursions (y probably equalling one nowadays) for which the decision is of course price sensitive but not exclusively so.

Tourism will be affected (and one might point out that golf could really lose out if the greens fees, already considered high in Mallorca, were to go up markedly) but not as much as is feared. The real killer isn't for tourism, it is for the domestic market. The constant rise in the cost of living is reaching a point, if it hasn't already, where it cannot be sustained without dire consequences of a different nature to those predicted for businesses. It isn't only IVA. If you pay 20 euros to put petrol into your car, you now get one euro's worth less, ever since the tax to pay for the health service was introduced in the Balearics. This is just one example.

Summer and the tourism season give false impressions. The season will finish soon enough. Then what? Unemployment going up, benefits down, IVA effects coming in, the tourism season is still in full swing in Andalucia and yet unionists have been helping themselves to supermarket goods and handing them out to those who have no means. Such Robin Hood acts could catch on, rather like a less benign form of robbery already has - house break-ins up massively in Mallorca. Things are about to get nasty.


Any comments to andrew@thealcudiaguide.com please.