Temporary VAT Reduction for Tourism & Hospitality Sectors
The Chancellor’s summer economic update introduced a significant reduction in the UK VAT rate from 15 July 2020 to 12 January 2021. The changes will apply to the Tourism and Hospitality sectors, where it is hoped that a new 5% rate for ‘specific supplies’ will help to stimulate consumer spending as we enter the next phase of our recovery from the Covid-19 pandemic. The measures will cover the following:
- Food and non-alcoholic drinks – The reduced (5%) rate of VAT will apply to the on-premises supplies of food and non-alcoholic drinks from pubs, restaurants, bars, cafés and similar premises across the UK. The reduced rate will also apply to supplies of hot takeaway food and drinks.
- Accommodation and attractions – The reduced (5%) rate of VAT will apply to supplies of hotel and holiday accommodation (including caravan & camping fees) and admission fees to attractions such as theatres, theme parks, museums, amusement parks, cinemas, safari parks, zoos & similar cultural events and facilities across the UK (it does NOT apply to sporting events)
Taken together with the easing of some lockdown restrictions, and other initiatives such as the Eat Out to Help Out scheme, it’s clear that the hospitality and tourism industries are a focus of the government’s efforts to support businesses affected by forced closures and social distancing.
There are two potentially competing drivers for this VAT reduction. As there is no legal requirement for businesses to reduce prices to reflect the lower tax rate, the ‘benefit’ of the reduction could be to leave more of the day’s takings in the hands of the business and support the business. However, if businesses pass on the tax saving (as Nandos, Pret A Manger and Starbucks have said they will), hard-pressed consumers will feel the benefit and perhaps increase their spending.
However, some businesses may not experience increased demand due to social distancing and may have limited ability to deliver on increases in demand if social distancing makes it difficult to take on additional staff or reinstate furloughed staff. Until these constraints ease and more restrictions lift, it might be commercially difficult for businesses to cut the price they charge.
Never was the ‘In it Together’ mantra more pertinent – many businesses in the tourism and hospitality sector have been closed and without income for months. They need the support of consumers. But consumers need the encouragement of a price reduction to come out and trade with local businesses. Some middle ground and understanding should see improved confidence for both as we work our way out of lockdown.
Alan Davis, Chairman & Head of VAT, MHA Henderson Loggie