In a sector facing soaring costs and plummeting consumer confidence, tomorrow’s increase in VAT gives operators no choice but to pass on price rises, UKHospitality warns
VAT in hospitality will rise from 12.5% to 20% today, at the same time as the sector is forecasting cost inflation running at 18%. The situation will result in double-digit price increases for consumers as operators struggle to survive, leading industry body UKHospitality says.
Recent business surveys show the industry is facing a 95% hike in energy bills, 19% in labour costs, and a 17% and 14% rise in food and drink prices, respectively. It is thought these pressures have worsened considerably in the last two weeks. Keeping VAT at 12.5% would have supported operators trying to absorb this tidal wave of cost increases, which come as consumers face their own cost of living crisis.
Raising prices at this time will wreak havoc on consumer demand, further damage an already fragile sector and have a detrimental impact on the wider UK recovery, as the sector will be unable to play its full role in generating jobs, investment and tourism. Prior to coronavirus, hospitality created £130bn in economic activity, generated £39bn of tax for the Exchequer and represented 10% of UK employment.
The UK already has one of the highest rates of tax for food and accommodation Europe - in France and Spain the VAT rate is set at just 10%, for example. In the UK there is consumer support for the lower rate of VAT among consumers with just one in five thinking it should return to 20% now, according to a YouGov poll.
Charlie Gilkes, founder and director of bar, restaurant and club operator The Inception Group, said: “In April hospitality is faced with a cliff edge, with an increase in national insurance, an increase in the national minimum wage and a substantial increase in business rates. This is on top of soaring energy and food costs. The Government could have helped ease the pain and aided the recovery by keeping VAT at 12.5% for longer but now the sector is also faced with this returning to 20%. Inevitably this going to be incredibly tough to bear and will massively exacerbate inflation.”
Sector investor, Paul Campbell, of Hill Capital Partners LLP said: “It’s disappointing that the Government has withdrawn virtually all support from a sector that can demonstrably help drive the recovery, growth and create jobs - it had the opportunity to be far more progressive. Hospitality businesses are fighting an unprecedented wave of cost increases and doing all they can to keep prices down for their customers. But the removal of VAT relief makes this impossible and will lead to more inflation and menu pricing will inevitably rise.”
UKHospitality CEO Kate Nicholls said: “Given the unfolding cost-of-living crisis for consumers and soaring operating costs for businesses the return to 20% VAT for the sector will prove nothing less than catastrophic.
“The now inevitable price rises for consumers will dampen demand and many hospitality businesses – one in three having less than a month of cash reserves and most are carrying heavy debt burdens – will fail as a result. This can only cause the UK’s wider economic recovery to falter.
“If the sector is to have any hope of playing its full role in fuelling the UK’s recovery then we need support. We will continue to work closely with government to achieve the best possible trading conditions for the industry, keep pushing for reform of fundamentally unfair and crippling business rates, play our role in solving our workforce crisis and persist in making a case for the clear benefits a permanently lower rate of VAT will have. A move which has support not just from UK consumers but a significant number of MPs as well.”