British aid spending, intended to support international development, is being impacted by the rising expenses of housing asylum seekers in UK hotels.

The government is paying Value Added Tax (VAT) on its bills for accommodating asylum seekers in hotels and is also categorising these expenses as part of its overseas development spending target.

However, critics argue that such tax payments should not be counted as international aid and that the high costs are a consequence of the backlog in asylum cases.

Critics raise concerns about transparency and mismanagement

The Labour chair of the international development committee Sarah Champion expressed concerns about the lack of transparency and control in the spending of Official Development Assistance (ODA).

She highlighted that the Treasury appears to be making decisions without clarity on where the funds are being allocated.

A senior research fellow at the Centre for Global Development Ranil Dissanayake criticised the mismanagement of the aid budget and emphasised the urgent need for reform in the system.

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A growing issue due to asylum system challenges

In 2020, the government announced a reduction in overseas development spending from 0.7% to around 0.5% of gross national income, linking it to the elimination of the current account deficit and a decrease in debt as a percentage of gross domestic product.

According to international rules, the costs of housing asylum seekers in the UK can be considered overseas development for the first 12 months after their arrival.

However, the number of asylum applications has significantly increased in recent years, leading to a backlog of unprocessed claims, resulting in about 37,000 people being housed in hotels annually at a cost of about £2bn ($2.6bn) – 16% of the overall aid budget.

VAT payments return substantial amounts to Treasury

A substantial portion of the money allocated to house asylum seekers in hotels is returning to the Treasury due to VAT charges.

Hotels charge 20% VAT for their rooms in the first 28 days, followed by a reduced rate, usually around 10%. Even at a conservative estimate of a 10% VAT rate, this would amount to £200m annually.

The exact breakdown of VAT in the hotel bills is not provided, making it difficult to determine the exact amount returned to the Treasury.

The UK is not the only country experiencing a sharp rise in the cost of housing asylum seekers.

According to OECD figures, the proportion of international aid spent on supporting people within the donor’s own country has increased from an average of 3% in 2010 to 14% currently.

However, unlike the UK, some countries are now treating such spending as additional to their planned development budgets rather than including it as part of them.

Countries such as Germany and Austria have excluded the costs of supporting asylum seekers from their projected aid spending plans.

Despite being a major donor globally, the UK’s aid spending faces increasing scrutiny due to the complex challenges posed by housing asylum seekers and the need for greater transparency and reform in the allocation of development funds.