Tourism tax: discussion document

This document has been prepared to support our national discussion on transient visitor (tourist) taxes in Scotland. Comments can be sent to

5. Issues for Consideration During the National Discussion

The Scottish Government believes that the issue of a transient visitor tax is a complex one, and one that requires careful consideration. In taking forward the national discussion, the Scottish Government is keen to explore these issues with partners in local government and the tourism sector, and in particular to consider:

  • The reasons and rationale for introducing a transient visitor tax;
  • How such a tax would be designed and operated;
  • What the potential impacts of such a tax could be; and,
  • How potential revenues from such a tax could be used.

The Scottish Government also recognises the importance of considering these questions with the Adam Smith principles of taxation – Certainty, Convenience, Efficiency, and Proportionality – in mind, and the vital need to balance questions of revenue need by different areas of government across Scotland with those of maintaining the tourism sector’s competitiveness, and supporting its contribution to delivering sustainable economic growth across Scotland. This section sets out some of the issues that would need to be considered in the broader discussions around development of tourist taxes in Scotland.

The Rationale for Transient Visitor Taxes

There are several arguments presented in favour of transient visitor taxes, both by researchers and by local government partners. CoSLA’s recent position paper[23] suggested two broad reasons:

  • The cost of maintaining the local environment and public services, which attract tourists, is borne by local taxpayers;
  • The wider costs entailed by tourism are also borne by local taxpayers.

These stem from the idea that tourism creates negative externalities, such as congestion, crowding or pollution, that impact on domestic residents and businesses, but which are not reflected in the prices that visitors pay[24].

An additional aspect of this argument is that tourists make use of ‘public goods’ (local amenities and public services, such as parks, utilities and waste collection) which are paid for through local or national funding, rather than by tourists themselves. Similar arguments are applied to tourists’ use of cultural amenities such as ‘free to enter’ museums, where costs are paid for by local or national residents[25]. A further variation of this argument is that tourism businesses benefit from wider marketing activities undertaken by Governments or tourist boards and funded from taxation, creating a case for those that benefit from the activities to help bear the costs of doing so.

However, there are counter-arguments to these rationales. One is that tourism creates positive externalities, such as providing domestic residents with access and exposure to other nationalities and cultures, greater international visibility and a positive international reputation[26]. There are also arguments that domestic visitors and businesses already indirectly contribute towards addressing the costs of tourism through general taxation. A third argument relates to how well proposals for transient visitor taxes levied on accommodation align with the visitors creating congestion or litter, particularly if the majority of an area’s visitors are day visitors, rather than those staying in accommodation.

A key concern of the tourism and hospitality sector is that the levying of a transient visitor tax could further increase cost burdens within the sector, undermining their competitiveness of the industry[27]. In recent months, tourism industry representatives have highlighted several areas of concern regarding rising business costs, including non-domestic rates, utilities costs, input costs, and workforce costs such as the National Living Wage and the Apprenticeship Levy, along with the relatively high levels of VAT on accommodation and restaurant and catering services set out in Section 4[28].

Design and Operation of Transient Visitor Taxes

The international experience of occupancy taxes set out in Section 4 highlights a number of practical questions over how transient visitor taxes would work in practice. A selection of these are set out below.

Who Would Design and Set a Tax?

With the exception of Malta, occupancy taxes that are levied within EU Member States are levied at municipal level. However, legislation by the Scottish Parliament would be required for such taxes to be levied in Scotland.

The evidence set out in Section 3 suggests that tourism differs across Scotland’s regions, in terms of scale, levels of activity, and the markets visitors come from. Local Authority partners have therefore advocated that each local authority should decide on where a tax should be applied, its design, and any exemptions[29]. However, a multiplicity of tax regimes within Scotland may create confusion among visitors, reduce certainty around their tax requirements, and create additional administrative burdens on the tourism sector. Similar arguments would apply to the level that any tax were set at, and whether any caps or limits were set on future rates.

What Form Should a Tax Take, Who Would Be Liable for It, and When Should It Be Levied?

International experience suggests there are several broad models for a transient visitor tax, with the most common including:

  • A flat rate per night (per person, or per room): these are relatively simple to communicate and calculate, but are regressive, as those staying in low cost accommodation would pay the same as those in higher cost accommodation;
  • A percentage of overall stay costs: calculated as a portion of the overall bill, and arguably a greater burden for single occupancies;
  • Flat rates per night, varying by bands: these are typically linked to the ‘star-rating’ of the accommodation. However, current rating systems in operation (such as that operated by VisitScotland) are currently voluntary in nature, and may not cover all accommodation providers.

As the evidence in Section 3 indicates, there are a range of different categories of accommodation, and business sizes. Applying a tax to all accommodation providers and categories, either within individual local authorities or at Scotland level, may be equitable in terms of treatment, but could impose relatively larger compliance burdens on smaller businesses. However, providing exemptions for different sizes or category of accommodation could be distortionary, while varying the size and categories of accommodation covered across Scotland could increase complexity.

Occupancy taxes operated in other countries also make use of exemptions, for groups such as business travellers, local residents, for children, or for those in temporary accommodation. Operating exemptions such as these may increase the complexity of any tax, particularly if they vary across Scotland, but may be viewed as being fairer.

As Section 3 indicates, rates of accommodation use vary across Scotland and across the year, with substantially higher levels of occupancy in summer months compared with winter months. Some areas, such as Venice, apply different tax rates at different times of the year. These may result in a smoother level of occupancy across the year; however, it may add increased complexity to any system, particularly if approaches vary across Scotland. If a tax was applied uniformly across the year, it could serve to reduce demand within off peak seasons.

In countries where occupancy taxes are used, they are typically levied when visitors are leaving their accommodation, rather than upfront. This potentially reduces the transparency of such a tax, and can create frustration among visitors[30].

Who Would Administer, Collect, Monitor and Enforce a Tax?

Internationally, some countries’ municipal or regional tax authorities collect occupancy taxes. Within Scotland, Local Authorities are responsible for collecting council tax and non-domestic rates. HMRC is responsible for collecting VAT, while Revenue Scotland is responsible for collection of Scotland’s devolved taxes, such as Land and Buildings Transaction Tax and Landfill Tax.

However, it is unclear at present how transient visitor taxes would be collected within Scotland, or what the administrative requirements on accommodation providers would be.

How Could Revenues Be Used, and Who Would Benefit?

In a number of countries that operate occupancy taxes, revenues are hypothecated for the development of tourism, or for services used by tourists[31]. However, hypothecation can take various forms, from ‘earmarked’ funding levels within broader budgets, to revenues collected being placed in dedicated funds, or shares of revenues being allocated to bodies undertaking activities that support tourism.

The range of activities that could be supported by transient visitor taxes is potentially broad. CoSLA’s position paper has suggested that revenues could be used to support general infrastructure, such as public transport, the roads network, and cleanliness; tourism superstructure, such as signage, attractions and refuse facilities; and tourist services. Local Authorities’ combined gross expenditure on support for tourism[32] was worth £27.2 million in real terms in 2016-17[33].

A range of activities that support tourism within Scotland, or attract tourists to Scotland, are also funded wholly or partially at national level. These include VisitScotland’s marketing activities, Scotland’s national museums and galleries, the historic estate maintained by Historic and Environment Scotland (HES), and direct funding support by Scottish Government. This support is significant: for instance, HES spent around £92 million in 2017-18, while VisitScotland’s total grant in aid funding, as set out in Budget 2017-18, was £41 million[34].

What Might the Impacts of Transient Visitor Taxes Be?

The overall impact of new or increased taxes on the tourism sector depend on a combination of factors[35]:

  • The extent to which the cost of a new tax, or tax rise, can be passed on by accommodation providers to consumers through increased prices; and,
  • Whether consumers are responsive to price increases, and how responsive they are.

The extent to which tax increases would be passed on to consumers would depend on the degree and intensity of competition among accommodation providers; their ability to adjust capacity quickly; and the extent to which accommodation providers and locations can differentiate themselves, and therefore charge higher prices. The extent to which cost increases can be passed through can also increase over time. Recent reviews of the economic literature suggest that, in general, tourist businesses would tend to pass on changes in taxes to consumers[36].

Consumers’ price responsiveness depends on factors such as the availability of substitutes, their tastes and preferences. There is limited available Scotland-specific evidence on price elasticities of demand for tourism. However, existing UK and international evidence offers a mixed picture. For instance, some studies find that travellers to Europe are relatively price sensitive[37]. Other studies have indicated that, while overall tourism to the UK may be relatively price insensitive, holidaymakers are significantly more price sensitive than those visiting for business purposes, while domestic holidays within the UK are highly responsive to changes in price[38].

Consumers’ responses may take a number of forms. For instance, they may spend more on accommodation, and less on other aspects of their trip, such as retail spending or meals; alternatively, they may vary the length of their trip, the accommodation they choose to stay in, or where they choose to stay, displacing expenditure from outwith the area where a transient visitor tax was imposed. Their responses may also be influenced by the point at which any tax is levied.

There is no Scotland-level proposal for a transient visitor tax, although City of Edinburgh Council are currently consulting on options of a tax of £2 per room, per night or of 2 per cent of the total bill. To help gauge the potential scale of price changes from different transient visitor tax scenarios, Table 6 sets out illustrative examples of the tax that would be added to different accommodation types across Scotland. The scenarios based on an average total room cost including VAT, during peak time, drawn from the Scottish Accommodation Occupancy Survey.

Table 6: Transient Visitor Tax Impacts Under Illustrative Scenarios[39]

Accommodation Type


Number of Nights

Average Total Room Cost

Tax Charge Added to Average Total Room Cost Under Transient Visitor Tax Scenario

£1 per night

£2 per night

£5 per night

+1% on Bill

+2% on Bill

+5% on Bill


3* Hotel









5* Hotel










3* Hotel









Scottish Borders

4* Hotel





























Argyll & Bute










Source: Scottish Government Analysis, based on Moffat Centre Analysis of Scottish Accommodation Occupancy Survey.

The illustrative analysis shown above indicates that when the tourism tax is based on a set price, for example £1 per night, the cost to tourists is similar across accommodation type and location. There is a greater disparity in price across accommodation type and location when the tourism tax is presented as a percentage of the bill.

The overall economic impact of a transient visitor tax will depend on the scale of any impact on the tourism sector and wider economy, combined with the impact arising from any revenues raised. There is limited evidence available on what the broader economic impact of transient visitor taxes would be, either at Scotland or UK level. Research by City of Edinburgh Council has suggested that 2 per cent of visitors would have chosen another destination if a £1 per room per night tax were in operation, increasing to 6 per cent of visitors if a £4 per room per night tax was in place[40]. A survey by STR found that, under a suggested £1 or £2 per room per night tourist tax, 75 per cent of visitors surveyed would not have changed their plans, while 2 per cent would not have travelled to Edinburgh, 6 per cent would have stayed outside the city, and 9 per cent would have stayed in cheaper accommodation[41]. The survey also found that 14 per cent of visitors were likely to reduce their non-accommodation spend in Edinburgh, with budget travellers, 25-34 year olds and domestic travellers indicating that they would potentially alter their behaviour or expenditure in response to a tax. Initial analysis by UK Hospitality of suggested a gross decline of £175 million of tourist expenditure from the introduction of a Scotland-wide tourist tax of £2 per room per night[42].

In their study for the European Commission, PWC highlighted a number of key messages around occupancy taxes. These included[43]:

  • The importance of balancing revenue needs and maintaining tourism competitiveness when making tax decisions;
  • That the perceived uniqueness of a location by visitors can affect their price sensitivity, have a bearing on the effectiveness of a tax, and can be influenced by governments;
  • That how a tax is introduced and administered has important implications for how the tourism sector responds to it, with credible hypothecation, transparency and industry involvement in deciding how funds are used being important for support;
  • The importance of considering compliance issues, to avoid occupancy taxes becoming a burden on businesses;
  • The importance of visibility of occupancy taxes, as these are not just an administrative issue, but one with potentially important impacts on consumer behaviour; and,
  • The importance of considering equity issues when designing occupancy taxes, given their different impacts on different groups.

Each of these issues would be important for the national discussion to consider as it develops.


Email: Kevin Brady

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