Turning Tourism Demand into Growth
Few would disagree that Scotland has had a significant summer on the world stage. Between the trials and tribulations of Scotland’s time in the World Cup, the Commonwealth Games returning to Glasgow, the global reach of Scotland’s screen locations, and the Edinburgh Fringe welcoming a record number of shows, you might expect Scotland’s tourism sector to be booming.
However, Scotland’s success in attracting visitors is not translating consistently into sustainable returns for the businesses serving them.
SCC’s latest survey saw tourism firms continue to report a widening gap between sales and profitability.
While sales remained weak, they changed relatively little from previous quarters, and cash flow did see some improvement from -33% to -22% during Q2.
At the same time, businesses continued to face significant cost pressures, particularly from energy bills, plus labour and fuel costs.
Together, these results suggest that businesses are continuing to attract customers but are struggling to convert revenue into profit and investment.
One potential reason for this is the growing cost disadvantage facing businesses operating in Scotland and the wider UK compared with international competitors.
In 2024, the UK ranked 113 out of 119 countries for its price competitiveness by the World Economic Forum’s Travel & Tourism Development Index due to a combination of factors, including one of the highest rates of VAT in Europe at 20%.
In our latest survey, a tourism firm said:
“Increased rates are causing severe concern combined with a raft of other additional or increased overheads. It’s preventing me having funds to carry out planned refurbishments which would have given work locally.”
This shows how pressure on tourism firms affects the wider economy. Delayed refurbishment means less work for local trades and suppliers. Over time, underinvestment can also weaken the quality and competitiveness of Scotland’s visitor offer.
Taxation remains one of the sector’s most significant concerns. Over the past year, an average of 67% of tourism firms reported being concerned about tax-related costs.
One tourism business said:
“VAT on hospitality in any other country is 5% or less. The UK are very unfair to their hospitality sector.”
Combined with the survey’s evidence of weakening profitability and investment, this suggests that tax policy is reducing the capacity of tourism businesses to grow and modernise.
The UK Government’s temporary VAT reduction from 20% to 5% for specified children’s meals, family tickets and attractions is welcome. However, its short duration and limited scope mean that it does not address the wider pressures facing accommodation providers, hospitality venues and other tourism businesses.
The UK Government should use evidence from the summer scheme to develop a permanent, broader reduced VAT rate for tourism and hospitality, covering accommodation, hospitality and visitor attractions.
It should also restore a modernised VAT-free shopping scheme for international visitors, helping Scotland compete for high-value overseas spending.
According to the Association of International Retail, reintroducing tax-free shopping could contribute an additional £457 million to the Scottish economy, along with an additional 9,140 jobs created.
The Scottish Government should also ensure that its approach to business taxation and regulation do not further erode the competitiveness of Scotland’s tourism sector. With concerns about taxation, inflation and business rates remaining elevated, policymakers should carefully assess the cumulative impact of new costs on businesses.
Any future measures, including Air Departure Tax and a potential cruise ship levy, should be accompanied by robust impact assessments and ongoing engagement with industry.
Q3 will show whether summer trading improves profits and cash flow. But seasonal demand alone will not solve the sector’s underlying problem. Scotland needs tourism businesses that can retain enough value to invest, employ people and improve their offer.
Reducing the tax and cost burden would give the sector what the survey shows it urgently lacks: the financial headroom to invest, compete and grow.
