What comes after the £1bn support for hospitality?

The Chancellor’s announcement in December of £1bn of extra support being given to those businesses directly affected by the Omicron wave has been welcomed with open arms. But will it be enough? Adam Lloyd, VAT specialist, and Andrew Perrot, Partner, for South West-based accountancy firm MHA Monahans, believe that most businesses will have likely hoped that this additional funding would have been announced alongside a reduction in the applicable VAT rate on hospitality and tourism back to 5%. Will this funding stretch as far as it needs to?

Though much of the world seems to be getting back to normal, those in the hospitality sector are still picking up the pieces. The Omicron variant caused further disruption to the industry, leading to cancellations in what is usually a peak season for businesses.

So, when the Chancellor announced an extra £1 billion in funding for hospitality, there was a general sense of ‘and then what?’. Despite much lobbying from leading voices in the industry to cancel the planned rises to VAT, the Government decided this was how they would provide support.

The new measures include:

  • One-off grants of up to £6,000 per premises, plus more than £100 million in discretionary funding made available for local authorities to support other businesses.
  • A pledge to cover Statutory Sick Pay for Covid-related absences for small and medium-sized hospitality businesses across the UK
  • £30 million in further funding available through the Culture Recovery Fund

So why isn’t this enough for hospitality businesses?

Long-term support

Since the introduction of VAT in 1971, there have been critics who rallied against it. Back then it was a 10 per cent charge added to certain goods and services and raised £1.5 billion a year for the Government’s coffers. Nowadays, VAT raises more than £100 billion each year and the rules and regulations get evermore complex.

Those in the hospitality industry have long argued that the rules put them at a disadvantage compared to other sectors, and that the rules allow for loopholes which create further disparity.

The classic example is that of high street chain Greggs. VAT is not applicable to the majority of food items sold at Greggs, because the rules apply to hot takeaway food but not cold takeaway food. The various pastries served at Greggs are cooked onsite but are not kept heated, so they qualify as cold items – even if you’re fortunate enough to get a piping hot pasty straight from the oven.

In 2012, then Chancellor tried to change this, and other loopholes, in a policy which became known as the ‘pasty tax’. However, intense backlash meant this was later scrapped.

Why should hospitality businesses pay less?

In most industries, VAT is a relatively easy cost to pass on to customers and to claim back against other expenses. But in the hospitality sector there is a much greater than usual disparity between Input VAT – that which can be reclaimed – and Output VAT – VAT which must be paid.

This is because food when purchased as raw ingredients is generally zero rated, meaning no VAT is paid. But, once prepared and heated and/or eaten on site, it is standard rated. This often means that hospitality businesses are paying more than 20 per cent of their sales in VAT while having little or no VAT to claim back on their purchases.

And, though this cost could be passed onto the customer, hospitality margins are typically low, with customers having little tolerance for increased prices.

So why won’t the Government lower VAT for hospitality?

It’s thought that a VAT reduction for hospitality businesses could cost the Government between £9-11 billion in revenue each year. Moreover, most Governments argue that it is not in the spirit of fairness to provide this relief to hospitality alone – even though many countries around the world implement a similar practice.

Hospitality businesses argue that this saving would allow them to invest more in their organisations, employ more staff and attract more customers. So far, this argument has failed to win hearts and minds. It’s also worth noting that VAT changes are apolitical, so it is generally an easy tax for Governments to raise without jeopardising party support.

What’s next for VAT in the hospitality sector?

In July 2020, as we were coming to the end of what would be England’s first lockdown, the Government cut the VAT rate in the hospitality sector to five per cent. This applied to any on-premises catering, hot takeaway food and drink, accommodation (including pitch fees) and attractions admissions fees. This, coupled with the Eat Out to Help Out scheme, provided a lifeline to businesses who were either able to encourage customers back with low prices, or hold on to a little more of their hard-earned cash.

This was only ever supposed to be a temporary measure, with VAT raised to 12.5 per cent on 1 October 2022, despite much pleading from the hospitality industry. As of 1 April this year, the rate will return to the standard 20 per cent.

Hospitality businesses are faced with a tough decision: do they swallow the additional cost of VAT and adjust their margins, or do they pass on this rise to the customer?

What should businesses consider?

We’ve covered many of the considerations hospitality businesses should make when it comes to planning for this year in detail over on our website.  Primarily, organisations must consider their VAT status which may have changed following the summer of 2021 if a profitable season was enjoyed.

Businesses must also take into account the size of their margins – can they swallow the increase in VAT or will they need to raise prices? How competitive is the business? Will the market tolerate the price increase?

Additionally, what impact will VAT have on cashflow? The bill is likely to be due in a quieter period, can the business afford to pay on time? How will this affect other bills?

Finally, businesses should ensure that they have taken appropriate steps to reduce their tax liability. There are always perfectly legal methods to lower a VAT bill, depending on the circumstances of the individual business. Owners should seek advice, particularly if their business has undergone significant change.

Beware the budget

Though the Autumn Budget 2021 did not deliver some of the longed-for measures businesses hoped, it was also not as punishing as many anticipated. Covid-19 has cost the Government billions, and at some point the bill will have to be paid. Organisations hoping for an extension to reduced VAT rate may be in for disappointment and a nasty surprise.

As in most circumstances, the best thing businesses can do is hope for the best and prepare for the worst. For help and advice, please visit the Monahans hub.