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VAT Reduction

COVID-19 has impacted every sector across the globe, with experts predicting it could take until 2023 to recover to pre-COVID-19 levels.  One sector that has been hit particularly hard is the hospitality sector.  It is estimated 80% of UK hospitality firms stopped trading in April due to the strict lockdown measures.  Here we look at some of the recent measures the Chancellor has laid out in his Summer Update to support the sector.

Summer Economic Update

The Chancellor delivered his Summer Economic Update in Parliament on 8th July 2020.  This wasn’t a budget per se, but it was a large £30 billion package of measures to support the economy.  Add this to the £160 billion of COVID-related measure already announced, and you can see it’s significance.  It also goes some way to explain how government borrowing could reach £350 billion this year.  These measures were intended to ‘support jobs in every part of the country, give businesses the confidence to retain and hire, and provide people with the tools they need to get better jobs.’

Some of the measures within the update included the Job Retention Bonus; Kickstart Scheme; High-Quality Traineeships for young people; Payments for employers who hire new apprentices; Eat Out to Help Out; Temporary Stamp Duty Land Tax; Green Homes Grant; Green Jobs Challenge Fund; Charities Grants; Cultural Recovery Fund; and Temporary VAT reduction for food, non-alcoholic drinks, accommodation and attractions.  We will focus on the latter here.

What is the Temporary VAT Reduction?

The Chancellor announced a VAT reduction from 20% to 5% for hospitality and tourism businesses.  The intention is for these businesses to pass the savings directly back to the consumer.  Whilst it is noted some of the larger chains such as McDonald’s and Nando’s have immediately passed savings on to the end-consumer, it isn’t mandatory for businesses to do so.  Furthermore, some smaller independent businesses don’t meet required VAT thresholds, so aren’t eligible for these savings.

From Wednesday 15th July 2020 until 12th January 2021, the reduction in VAT will be effective for all hospitality and tourism businesses.  This means all restaurants, hotels and attractions will only have to the reduced rate of Tax on sales.  It is intended to give a major boost to the economic sector which has been hardest hit during the lockdown.  The Government expect that initiative to cost them £4.1 billion.

Who does the VAT Reduction apply to?

We’ve mentioned it applies to the hospitality and tourism business.  Specifically, it applies to the following areas: –

  • Food and non-alcoholic drinks – This applies to takeaways and also food and drinks consumed on business premises such as cafes, restaurants and pubs.  It doesn’t include alcoholic drinks.  Also excluded are pre-prepared cold takeaways such as pre-packed sandwiches.
  • Holiday sleeping accommodation – This includes hotels and pitch fees for caravan and tents.
  • Admission to some attractions – This includes museums, theatres, zoos, amusement arcades, cinemas etc.

Will the end-consumer benefit?

There are some concerns that the savings might not be passed on to consumers.  Some larger companies and chains have already promised to pass the savings on to consumers.  Coffee chains such as Starbucks, Costa and Pret A Manager have already promised to pass on the 15% discount to consumers.  McDonald’s had recommended its franchises to cut prices on it’s best selling products such as the Big Mac, the Quarter Pounder and Happy Meals.  Nando’s claim to have changed the prices accordingly, as have KFC, Wetherspoons and Greggs to name but a few.

A number of hotel chains have also confirmed price cuts.  The Accor Hotel Group which includes the likes of Mercure, Ibis, Novotel, Sofitel have passed the savings on to consumers via future bookings and food and drink.  Holiday parks such as Butlins, Haven, Warner and Park Holidays are also passing the savings on.

Eat Out To Help Out Scheme

Alongside the VAT reduction scheme, the Government also launched the Eat Out Scheme during August.  This gives consumers 50% off meals up to a saving of £10 per customer.

So in summary, the VAT reduction scheme, regardless of whether all businesses will pass the savings on, will provide a welcome boost to the hospitality industry.  Consumers need an incentive to spend their money, alongside the confidence to enter premises where this is still a risk of contracting COVID.  The Eat Out Scheme in August will certainly help and we hope this can be extended beyond August.

 

Nigel Carr
Nigel Carr
Nigel is a freelance financial writer and Author at Kinsella Tax. A business graduate he writes on financial matters as well as music for a number of high quality websites.
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