Is this the final call for a VAT cut?

Hospitality faces a perfect storm of issues and a VAT cut could offer a reprieve – but the government still isn’t listening

“The wolf is at the door and there is a narrow window where government can listen and act,” said night time economy advisor for the West Midlands Alex Claridge as he called for a hospitality VAT cut from government.

January’s closures highlighted how challenging operating in the sector has become and intensified calls for a sector-specific reduction to the standard 20% VAT rate to deliver urgent relief.

Claridge’s passionate call for action continued with a warning: “If [action is not taken], said beast will tear our beloved industry to shreds, leaving our high streets, city centres and towns bloody and barren, millions out of work and the taxman enjoying adding 20% of nothing to the public purse.”

Peter Borg-Neal, founder and chief executive of Oakman Inns, who has long campaigned on the issue, is clear that the cumulative tax burden on hospitality is too onerous. He said: “When you combine VAT with business rates, alcohol duty and every other kind of tax, the burden is just far too high. With us then being hit by inflation and not being able to pass that cost on to the customers, the margins are being squeezed.

“A VAT reduction to bring parity with Europe would be transformative for the sector. It would take us from a business that is living hand-to-mouth to a business that could start opening pubs again.”

UKHospitality has made campaigning for a VAT cut a priority in 2024, while night time economy advisors, including Manchester’s Sacha Lord and Claridge, have campaigned on the issue alongside business groups and chambers of commerce. Kate Nicholls, chief executive of UKHospitality, said: “Businesses across the sector are currently facing a tough economic environment, and with the costs of doing business continuing to rise, the sector urgently needs government support. A lower rate of VAT for the sector would help pubs, restaurants and many more recover. It would also provide the boost that could keep many in business.

“Having a lower rate of VAT for hospitality also benefits all aspects of society and the economy, helping to bring prices down, providing businesses with the opportunity to invest and grow and giving consumers greater choice on the high street.”

Lack of competition

The sector has long called for a reduction to bring hospitality VAT in line with other European countries (France, Italy and Spain apply VAT to hospitality at 10%, while in Ireland it is 13.5%). However, with VAT the third-biggest income generator for the government, after income tax and national insurance, these calls have been resisted outside of the interventions made during the Covid-19 pandemic.

Operators have argued that the rate of VAT charged to hospitality makes it harder to compete both internationally and against other sectors in the UK, with the majority of consumers unaware of the tax burden placed on the industry.

Tom Fahey, chef-owner of the Terrace restaurant in Yarmouth on the Isle of Wight and the Terrace Rooms in nearby Ventnor Bay, explains where this lack of understanding leaves operators: “The consumer compares you to a supermarket [where VAT is not added to food prices]. They’re comparing what you charge to what a supermarket charges and that’s not a fair comparison.

“I have actually written a disclaimer on the bottom of the menu of the Terrace in Ventnor saying ‘this is the reality of what we actually take, if you think that’s a bit bad, please send an email to our MP’.”

 

It seems like if you’re treading water, you’re doing well

Similarly, Veryan Palmer, director of the five-AA-star Headland hotel in Newquay, Cornwall, said guests have questioned why it is more expensive to stay in the UK than in other European destinations.

She said: “I think it makes the UK almost uncompetitive with other countries in Europe. At the moment, with high energy costs and the sharp rise in wages, it seems like if you’re treading water, you’re doing well. It’s right that we’re a real living wage employer and it’s right that we have high wages, but it’s scary in Cornwall how many hospitality businesses are already saying they won’t be opening this year.”

Government resistance

When the industry reopened after the initial Covid-19 lockdown in 2020 the government reduced VAT for hospitality to 5% to support its recovery. In October 2021 this was increased to 12.5% before it returned to its previous rate of 20% from 1 April 2022.

In April 2023, as costs soared, the Treasury said it had no plans to reduce the rate of VAT again. Ministers said previous relief had cost more than £8b and “introducing a 10% rate would come at significant further cost”.

But for Borg-Neal, this is an oversimplification that fails to take into account the loss in tax revenue if businesses close or if they do not expand as they would in more favourable conditions. He said: “A food-driven pub will pay nearly 50% of its turnover in tax. If you’re opening fewer [sites] and others are closing, the overall tax take is going to go down.

“It’s a complicated calculation, but there’s no doubt that cutting VAT would not be a straight cut to the Treasury. It will get that money back in other ways.”

Arguments opposing a VAT cut for hospitality include a concern from government that further sector-specific cuts would be called for, as well as the perception that such a cut would not be passed on to consumers and stimulate the economy.

Claridge, who is chef patron of the Wilderness restaurant in Birmingham, responded: “To demand equal treatment for all sectors is to ignore fundamentally different business profiles, different margins and, accordingly, different degrees of tolerance for inflation of costs.

“Costs are easily 10% higher – and significantly more for many – than even 12 months ago. National Minimum Wage increases of over 10% this April, with no mitigation for businesses, do nothing to help. Increasing wine duties, but allowing us to sell pints of wine, does nothing to help. It is unfair to say nothing has been done but, simply put, the actions taken to date do not balance the compound, sustained and continued rapid change of costs.”

 

They’re just trying to get prices as low as possible without going out of business

For Fahey, the argument that a VAT cut would not be passed on is an ill-judged assessment. The restaurateur, who has recently launched a £10 set lunch menu at his Yarmouth restaurant, said: “I think right now we would pass [a VAT reduction] on because one of the things we’re trying to do is keep our prices as low as possible. We don’t tend to create a price and then add VAT, I think everyone in hospitality is so conscious of the squeeze on incomes that they’re just trying to get prices as low as possible without going out of business, because you want people to come.”

There is some optimism from the industry that a reduction could be granted. Last week Lord, nighttime economy advisor for Manchester, tweeted: “I left a meeting in London this week, feeling the most positive I ever have about achieving this [a reduction in VAT].” He added: “Still a long shot, but we need to come together.”

However Peter Williams, VAT partner at accounting and consulting firm RSM UK, remains sceptical about the chances of seeing VAT cut for hospitality in the Spring Budget.

He said: “It is, of course, possible that with a general election looming in the UK, the government may look closely at either targeted help for the hospitality sector or the return of tax-free shopping for overseas visitors, but the mood music seems to suggest that the chancellor of the exchequer’s current priorities for tax cuts lie elsewhere.”

April Jackson, chef-patron of Wood & Water in London’s Brixton, has joined calls for action and is clear about the toll cost pressures are taking on operators. She said: “At this time, I am trying to figure out how to keep a healthy, positive work environment for my team as I juggle the burden behind the scenes, when customers are spending less, eating out less but all the costs continue to rise.

“I believe in what we do so much at Wood & Water that for now I continue to fight, but if things do not get better, I may be joining the list of closures. A VAT reduction would be a welcome gesture of support for our well-deserved industry by the government.”

For Claridge, cutting VAT is the only answer. He said: “VAT is not the end, but the only plausible way to stabilise our industry so we can get back to building and building better.”