Although the inflation rate has eased somewhat in recent months many people are still feeling the squeeze of higher costs for their day-to-day essentials on top of higher household costs for energy and their mortgage. When consumers feel this pressure many will react by cutting back on their discretionary spend and this impacts on a number of industries – including the hospitality sector.
During the pandemic hospitality businesses received a great deal of support from the government – a reduced rate of VAT, Eat Out to Help Out and various grants for example. Since the pandemic however that support has dropped away and VAT has returned to 20% - there is still some relief available through the business rates system but many hospitality businesses are undoubtedly feeling the squeeze at the moment. Insolvencies in the sector are increasing rapidly – 2023 saw a rise of 22% in administrations of hospitality businesses compared to 2022, and a 91% increase compared to 2021. This does not even take into account businesses which have simply shut their doors – Simon Rimmer’s Greens restaurant in West Disbury being one very high-profile victim of the current challenges facing the industry.
With this in mind, hospitality industry bodies and high profile industry figures are calling for a reduced rate of VAT to 10%, through direct lobbying, social media channels and an online petition which to date has garnered something close to 12,000 signatures.
Reducing VAT seems like a simple measure which could have a real impact but it brings with it a choice for the businesses concerned. Do they, for example, keep their menu prices as they stand a retain more of the gross income for themselves, or do they reduce prices to reflect the VAT cut and hope by doing so they drive greater footfall and in effect sacrifice some margin for greater volume of sales. Many consumers on hearing of a VAT cut might expect menu prices to fall and may be disappointed if prices remain the same – not realising perhaps that this is how the restaurant or pub concerned will be able to generate more cash into their bank account to keep them afloat. The decision is not a simple one and it may need some clear communication to customers to ensure they understand the impact the change might have on the business and those eating there.
At the more nuts and bolts level ensuring till and accounting systems are up to date would also be a key to making sure there are no issues in the future. The Covid VAT cut did not apply to alcoholic beverages and one might expect a similar approach this time round if a cut is introduced.
From a policy point of view the choice is not an easy one for the Government either. Defining what hospitality means would be a key question – during Covid it extended to hotels and caravan/camp sites – would this be appropriate this time or does the definition just extend to restaurants, pubs and similar venues? In purely numeric terms the equation balances the loss of VAT revenue versus (hopefully) higher tax on profits and less cost in the way of benefits for those who may lose their job, as well as securing businesses in the supply chain that will also be struggling as their customer businesses fail or wind back. Politically it is also a balancing act – on the one hand a positive message in supporting struggling businesses, but on the other hand, it may increase pressure from other sectors for similar treatment – hard-pressed retailers for example may well feel they deserve similar support.
None of this is to say that the sector is not deserving of support – the social and economic benefits of a thriving hospitality sector are clear. As with all of these things however, a seemingly simple solution often carries with it a raft of potential complications which have to be taken into account and both a government and a business level.
Of course it is not just hospitality businesses that face challenges with VAT. Whether things have gone wrong in the past and you need to tell HMRC, you are unsure of the VAT treatment of a transaction or you are simply struggling to pay your VAT bill this period, ETC Tax can assist in navigating through the challenges and making sure you don’t run into trouble with HMRC.
