Potential local authority level Cruise Ship Levy in Scotland: partial business and regulatory impact assessment

Section 3: Costs, impacts and benefits

Costs to businesses

There are potential direct and indirect costs to business that a cruise ship levy could create, partly dependent on the way a levy was designed and implemented. In this section, the total effect on business is not quantified as the details of a cruise ship levy have not been decided. There is not yet clarity on the extent to which a levy would be implemented by councils in Scotland, the rate at which it would be set and any consequential behavioural response from industry.

This iteration of the BRIA does, however, identify potential costs and set out some illustrations on their scale if a hypothetical levy was implemented at a certain rate. For the purposes of illustrating potential costings and income streams we have used an example rate of £5.00 per passenger and a flat £0.10 per gross tonne. These are merely illustrative and do not indicate council decisions or any rate preferred by the Scottish Government. No exemptions for any types of passengers or ships are included in the analysis at this stage. Crew are not included in calculations of hypothetical revenues.

Where costs are totalled up to a national level, 2024 is used as a reference year. This is because 2024 is the most recent full year for which we have figures on cruise calls in Scotland. We have not made any assumptions on the growth or decline of cruise tourism in Scotland in future years. We would welcome evidence on this.

Direct Costs

A cruise ship levy, if introduced by a local authority, would directly create an additional cost for those operating cruise ships that call at an affected port. The level of the impact would depend on the structure and level of the charge, and which local authorities chose to implement a levy.

It is estimated that approximately two thirds of the passengers carried on cruise ships to Scottish ports in 2024 were carried by cruise ships that were operated by non-UK based companies. The majority of the direct cost of taxation would therefore fall upon non-UK businesses who are operating international voyages and interact with the UK economy as customers of UK ports and tourism service providers.

Some of this additional cost could be passed on to passengers, but it is not known what the level of this would be. Given the majority of passengers visiting Scotland on cruises are not UK residents, most of the effect of the additional taxation would be outwith the UK. Industry engagement has indicated that the USA and Germany are particularly large markets for cruise holidays calling in Scotland.

To illustrate the potential level of levy charged per ship we have used a hypothetical charge, as discussed above. The public consultation is currently seeking views on who should set the level of charge, and if a cap should be in place. Using these hypothetical charges a median cruise ship calling at a Scottish port in 2024 carried approximately 700 passengers and measured approximately 30,000 gross tons (GT; a standard measure of internal volume). If a hypothetical charge of £5 per passenger was in place it a cruise ship levy would total £3,500 for a port call if charged on passenger capacity; or approximately £3,000 if a cruise ship levy was based on disembarkation due to a lower number of passengers being in scope of the levy. Setting a roughly equivalent charge based on gross tonnage at 10p per GT would be expected to raise around £3,000.

Larger cruise ships, in general, tend to have relatively more passenger capacity per GT than smaller cruise ships. As more cabins are added, other parts of the ship do not necessarily need to expand in equal proportions. The means that a per passenger charge would be likely to be higher for a larger ship and lower for a smaller ship than an equivalent gross tonnage charge, although the smallest cruise ships tend to have the highest number of passengers per gross ton, given their limited communal areas. This is shown in Table 4 with three illustrative examples.

As can be seen from the table above using these hypothetical values would mean a cruise ship levy could raise between £785 to £20,000 depending on the basis of the charge and the size of the ship. These totals are before any administrative costs are taken into account. Applying these hypothetical charges to the totals shown in Table 1 gives an approximate total revenue for Scotland as a whole, for a year with the same number of port calls as in 2024, and if every port was to have such a levy, of:

• up to £5m if a cruise ship levy was based on disembarking passengers;
• up to £6m if a cruise ship levy was based on the passenger capacity of a cruise ship;
• up to £5m if a cruise ship levy was based on the gross tonnage of a cruise ship.

The Scottish Government has not been able to definitively establish the number of cruise calls that tender to the shore from anchorages. Assuming that a cruise ship levy did not apply to such anchorages, reflecting the legal position that for most local authorities their boundary ends at the foreshore, we estimate this would reduce the maximum chargeable amount by at least £0.5m for the GT and Passenger Capacity designs. This estimate is based on known use of anchorages at Edinburgh, Orkney, and Stornoway only. It is not currently known to what extent other ports in Scotland use anchorages and tender their passengers to shore for some or all cruise calls. The Scottish Government would welcome further evidence on what proportion of cruise passengers reach the shore by tender.

Overall Scottish Government modelling, based on hypothetical rates, indicates an overall range of estimated revenues at a national level of £4m - £6m, using 2024 as a reference year.

Indirect Costs

A cruise ship levy would create some costs for businesses related to complying with such a levy. For example, additional staff time might be required, and new systems, or changes to existing systems, might need to be put in place. As this point it is unclear how much time would be required, or who would take on additional burdens, given policy work is underway, and the public consultation is seeking views on some of these points.

If a fee is required to be paid in a separate process to existing port fees, staff on affected ships may handle any additional administrative work themselves, or contract it out to a shipping agent, professionals who can handle interactions between ship and port. It could also be that the charge is paid as part of port fees and so creates no significant additional administrative burden on ship operators and may create a burden on port operators.

To illustrate the scale of possible impacts on business, the Scottish Government has produced an estimate of the cost of the time required to comply with the new requirements around a cruise ship levy for a ship making a port call. Being required to make a payment at each port call represents an upper limit on the administrative burden on operators, given that a policy option could be for the tax to be paid in a single annual return.

We have made some assumptions to allow us to make an estimate of the administrative burden of a ship making a payment at each port call. These are set out in turn below:

• Cost of time: It is assumed that a junior officer would handle the necessary process to comply with the levy. The estimated annual salary of a junior officer on board cruise ship is assumed to be £40,000 (National Careers Service, n.d.). The overhead costs of employment, such as pension and non-salary benefits to the company adds 30%, making the annual cost of employment £52,000, or approximately £1,000 per week. With a working week of approximately 50 hours this implies an hourly cost of employment of £20. The cost of labour is a standard proxy for the opportunity cost, and therefore market value, of staff time and is not necessarily reflective of additional direct financial costs faced by their employer (HM Treasury, 2024).
• The required process for paying a cruise ship levy has yet to be fully defined. For indicative purposes we have assumed it would add approximately fifteen to thirty minutes onto the other processes a cruise ship operator would be required to complete for each port call.

This, along with an assumption that all port calls are in scope, allows us to estimate an illustrative total labour cost for a year, based on a similar level of port calls as 2024.

Using these assumptions implies an illustrative labour cost of £5.00 - £10.00 per port call per ship. It may be that the officers are too busy on approach to a port call to complete new administrative tasks. The ship operator may choose to employ the services of a shipping agent instead. The salary of a shipping agent is approximately equivalent to that of a junior officer. The additional costs involved in employing another company rather than handling administrative processes in-house may mean that the upper limit of cost per port call should be taken as £20 to be conservative. This implies an indirect cost to business of between £5.00 - £20.00 per affected port call.

With 1,025 port calls in 2024, this implies an annual indirect cost to business of between approximately £5,000 and £20,000, if all Scottish councils were to introduce a cruise ship levy. Of this, approximately £1,500 to £5,500 might be borne by UK businesses, as about 280 of the port calls were identified as UK owned ships.

A levy based on disembarking passengers might create an additional administrative requirement on the ship operator or port operator to carry out an accurate count of passengers disembarking. The Scottish Government would welcome evidence on the likely cost of this, beyond the measures that are already in place to keep track of passengers disembarking and re-boarding the ship.

Other impacts

Implementation of a new cruise ship levy would increase the cost of a cruise voyage that calls at a port with a levy in force. This could affect decisions by cruise operators on whether to include certain Scottish ports in their itinerary. However, it is unclear, at this stage, to what extent the requirement to pay a levy would increase the cost of a port call enough to affect operators’ decisions around this.

Scotland, like many of the locations that have levies on cruise tourism in place, is a unique cultural destination that many people are willing to pay a premium to visit. Passengers may therefore be more willing to accept additional costs than visitors to, for example, a resort destination where they may look for alternatives with a similar climate. Nevertheless, the potential impact on port calls by cruise ships is a key uncertainty around the proposed levy.

If operators were to reduce their planned port calls in Scotland, there would be a reduction in tourism spend and spending by passengers and cruise ship operators in Scotland. There are diverging figures around how much money cruise passengers spend during their time ashore. This is covered in more detail in section 1 above. A cruise ship operator’s outgoing costs during a port call will vary widely due to many factors. There is therefore a high level of uncertainty around the potential level and impact of any behavioural effect.

A high estimate of a reduction in tourism spend from a larger cruise ship deciding not to visit a port is in the region of several hundred thousand pounds. The equivalent for a median size ship carrying under a thousand passengers would be in the tens of thousands of pounds. This impact would be felt by local hospitality, leisure and retail businesses.

The port itself would also see a reduction in the revenue it receives from port fees if there was a lower demand for port services. The scale of this impact would likely be in the tens of thousands of pounds, depending on the port, the sizes of the ships concerned, and which services it would have required. As an example, a cruise ship with 4,000 passengers docking at Greenock for 12 hours might expect to be charged approximately £100,000 in port charges. A smaller vessel with approximately 200 passengers might expect to be charged approximately £40,000. Many of the port fees and charges are charged at a fixed rate, so economies of scale exist, where the charge payable per passenger will be lower on larger ships. Other ports will charge different amounts for the equivalent ships.

There is also a potential spillover impact should a council with a major port introduces a cruise levy at a level that reduces the number of cruise visits there. Some of those ships could also cancel visits to other Scottish ports due to reorganising their itineraries. This would impact these other ports and their associated visitor economy. When planning an itinerary that could include port calls in Scotland, cruise operators may decide not to make some or all of those calls due to the additional cost. On the other hand, a cruise ship operator may decide to call at a different port if it seems to offer better value for money. It is not possible to model this impact with any certainty at this stage.

There are unlikely to be any significant effects on tax revenues for the Scottish Government or the UK government beyond VAT on some of the potential lost spending. This is for a number of reasons, including that cruise operators are eligible for a range of tax exemptions. The majority of cruise ship activity in Scotland is carried out by non-UK companies, who will pay business taxes in the country in which they are registered for tax purposes rather than the UK. Those cruise ship operators who are based in the UK may be eligible to pay Tonnage Tax instead of Corporation Tax, which is based on the size of their ships rather than the profit of the business. The tax is not, therefore, related to their level of activity and where it takes place, but their existing investment in ships.

Cruise visits to Scotland are also generally part of an international voyage, often including stops in Norway, Iceland, Ireland or continental Europe. Because of this cruise ship operators will qualify for zero tax rating with regards to VAT on the relevant ticket sales and fuel. Port fees and handling services are also zero rated for VAT.

Seafarers working on board will be from a wide range of countries, including the UK. For those seafarers who are UK tax resident, they are likely to be eligible for a tax relief by way of working on a ship and being outside the UK for the majority of the year (HM Revenue & Customs, 2024).

Scottish firms’ international competitiveness

The main group of firms that would have their international competitiveness affected by any cruise ship levy would be port operators at affected ports in Scotland. A levy being implemented by a local authority would increase the cost for an affected port of doing business, i.e. the cost to a cruise ship operator of calling at that port or the cost to the port of accepting a cruise ship visit.

Cruise ship operators generally plan their itineraries several years in advance. However, given the inherent moveability of their ships, operators are also able to change the itinerary relatively easily to avoid or visit certain ports, countries or regions. This could be to, for example, avoid security concerns or additional costs, or to offer a visit to a new attraction.

This means that, unlike an accommodation business at a fixed location, a cruise ship can choose not to operate in a jurisdiction that charges additional tax or charges if they have an acceptable alternative. Ports with a cruise ship levy could therefore be vulnerable to competition from other ports in Scotland, the rest of the UK, or overseas, if they appear to offer relatively better value.

Benefits to business

If a cruise ship levy is implemented, affected councils could choose to re-invest the revenues raised in their local visitor economy. This might include helping improve the local visitor offer and supporting attractions through the low season when cruise ships are not making frequent visits.

Given the extent to which evidence on the pressures caused by cruise passengers focuses on congestion, these issues could be eased by targeted investment in local access. This would have benefits to local businesses by improving physical access to their properties, which could be affecting demand.

These potential benefits are hypothetical and not possible to quantify at this stage. The public consultation is seeking views on how any funding raised by a cruise ship levy could be used.

Small business impacts

Some smaller firms may be impacted by a potential cruise ship levy. While the sector is dominated by larger firms, some cruise ships that are owned by smaller companies also operate in Scotland. These smaller companies may have less ability to absorb, or pass on, costs or administrative burdens. The Scottish Government will continue to explore this aspect further. We welcome more information about smaller firms and potential ways to mitigate the impact of any cruise ship levy.

Investment

A cruise ship levy could raise additional funds for some local authorities in Scotland. Councils could choose to invest this in their local visitor economy and infrastructure. Additional council investment may in turn attract further international investment, for example if investment is channelled into improving physical access and transport in locations popular with visitors. It may also support access to the ports themselves, for example alleviating congestion. Investment such as this could support international investment in the ports sector.

These potential benefits are hypothetical and it is not possible to quantify them at this stage. The public consultation is seeking views on the possible use of funding raised by a cruise ship levy.

Workforce and Fair Work

No direct impacts on the workforce or fair work have been identified at this stage.

Climate change/ Circular Economy

One of the considerations in the consultation is whether there can be a policy design that takes into account environmental aspects. This could include giving a tax relief or other benefit to ships with lower emissions or otherwise higher environmental standards. If this is taken forward and implemented, it could help the ports sector in Scotland reduce emissions associated with shipping. Although international shipping is outside the scope of Scotland’s emissions reduction targets, it could nevertheless help reduce overall emissions related to the Scottish economy. This assessment can be developed at a later stage of policy development.

Competition Assessment

Given that the proposed levy would be implemented locally, there is a possibility that two competing ports would face different costs of doing business, given that one might be in scope of a cruise levy and one might not. This may affect the ability of the two ports to compete for cruise business. It is not known, however, which councils would be more likely to implement than others, and at what levels they might set a potential levy. This is an area the Scottish Government will explore further as work on a potential cruise ship levy moves forward and there is greater certainty on areas such as the basis of the charge.

Consumer Duty

We do not at this point have certainty on how a potential cruise ship levy would be implemented, including who would be required to pay such levy and the basis on which it would be charged. All of these aspects are material to assessing accurately the implications for consumers of a potential cruise ship levy. We will be revising and updating this section in future iterations of the BRIA.