ABN Amro and Rabobank united in opinion: 'VAT increase leads to negative spiral'

The increase in VAT on overnight stays in hotels and holiday parks from 9 per cent to 21 per cent will go ahead for now, the House of Representatives recently decided. However, the measure has significant implications for the tourism sector in the Netherlands. Both Stef Driessen from ABN Amro as Rabobank's Jos Klerx warn of its negative impact.

According to the cabinet, the VAT increase leads to a 6.75 per cent drop in the number of overnight stays, but what the government is not sufficiently taking into account, according toDriessen, Sector Banker Hotels & Leisure at ABN Amro, is the chain reaction it causes in the tourism sector. "Fewer tourists also means less spending in related sectors such as hospitality, shops and excursion providers," Driessen argues.

Jos Klerx, Sector Manager Hospitality and Recreation at Rabobank endorses Driessen's concerns. He argues that the VAT increase will reduce the investment scope of hotels and holiday parks, especially in the areas of sustainability and digitalisation. "Hotels need to invest to meet future requirements, such as sustainability and digitalisation because of the staff shortage. If the investment space gets smaller, it could lead to a downward spiral of declining quality and competitiveness," Klerx said.

According to ABN AMRO, hotels annually reserve 4 to 6 per cent of their turnover for reinvestment in furniture, facilities and equipment. Driessen: "Less revenue reduces investment space, which can lead to lower maintenance and lower quality accommodation. This makes the sector less attractive, for both tourists and business travellers."

Hotels will also soon have less room for essential investments in sustainability. A recent survey by consultant Horwath HTL, conducted among 354 hotel managers, shows that 40 per cent of hotel managers expect to invest less in sustainability as a result of the announced VAT increase, rising to 64 per cent among three-star hotels. "Reduced investments mainly affect suppliers, such as construction companies and landscape architects," Driessen outlines. "This type of suppliers will therefore see lower revenues and less tax revenue for the government."

Klerx stresses that lower quality can lead to negative reviews, which in turn results in lower occupancy rates and lower room rates. "Accommodations with a review score above 9 are arguably more profitable. I have studied that a 1-point improvement in review score increases the likelihood of bookings by 11.2 per cent, thus justifying higher room rates. Conversely, lower review scores can lead to significantly lower room rates, further increasing the financial pressure on hotels."

Both Driessen and Klerx point to the risk that the measure will ultimately generate less tax revenue than expected. Klerx notes that the side effects of the VAT increase have not been thoroughly researched and may result in disappointing revenues. "It is possible that the government may end up receiving less tax revenue than it is counting on, as lower occupancy rates and falling margins may also reduce profit tax and revenue from other taxes," Klerx said.

Driessen added: "In 2023, foreign travellers spent €19.6 billion in the Netherlands, according to Statistics Netherlands (CBS). Part of this came from business travellers, guests who can reclaim VAT through the company they work for. Therefore, if we look only at private trips by foreigners, the expenditure is 13.8 billion euros. On average, 23 per cent of the holiday budget of foreign accommodation tourists in the Netherlands goes on accommodation itself, while 77 per cent (10.6 billion euros) is spent in related sectors."

Based on the 6.75 per cent drop in overnight stays as forecast by the central government, this means as much as €826 million less spending in related sectors, according to Driessen. "This then leads at a VAT rate of 21 per cent to a drop in tax revenue of up to €179 million. However, this is under the assumption that Dutch tourists who no longer stay somewhere overnight do not swap their domestic stays for day trips from home, but spend their holidays abroad."

So the VAT increase not only affects hotels themselves, but also affects the wider tourism sector. Fewer tourists also means a big blow to restaurants, museums and shops, for example, which depend on tourist spending.

Fully passing on the VAT increase to guests is not obvious, both Driessen and Klerx believe. After all, hotel rooms are priced according to the principle of 'dynamic pricing', with rates rising when demand is high and falling when demand is low. Driessen: "This system is not unique to the hotel and holiday park sector, but is also applied in markets such as energy and agricultural commodities. A crucial difference, however, is that hotel rooms cannot be kept in stock; a night not sold means immediate loss of revenue. As a result, cost increases, such as a VAT increase, cannot easily be passed on to consumers."

In Amsterdam, for example, hotels were forced to reduce their average room rate (ADR) by 1.8 per cent in the first three quarters of 2024 to keep occupancy rates at the same level of 2023 (75.7 per cent). This was a direct consequence of increasing competition from other European capitals and growing competition with private holiday rentals. Moreover, demand for hotel rooms drops rapidly when psychological price limits are exceeded, such as a room rate above 200 euros.

Therefore, a tax increase, such as a 12 percentage point increase in VAT on turnover, cannot simply be passed on. "This can have a significant impact on financial results," Driessen describes. "Between 2012 and 2019, the average pre-tax profit in this sector was around 9 per cent of total operating income. Companies under financial pressure sometimes cut back on essential aspects that are crucial for their survival."

Klerx advocates thinking carefully about the side effects before introducing such measures. "The uncertainty among entrepreneurs in the sector is high. We simply do not know what the exact effects will be, but the signals point to a considerable negative impact," Klerx said.  

Tip: adjust invoice
Hotels and holiday parks can alleviate the tax burden somewhat by listing services covered by the lower VAT rate, such as food, non-alcoholic drinks, access to sports, swimming, entertainment and play facilities, separately on the invoice. Also, tourist tax need not be taxed if it is listed separately on the invoice. This can help reduce the additional tax burden.