As the hospitality sector gears up for the festive party season, businesses are hoping for an early Christmas present from Phillip Hammond when he delivers his first autumn budget later this month. We believe that top of the wish list would be the reduction of VAT to all leisure and hospitality businesses, which would provide a welcome boost to an industry which has struggled in a climate of economic uncertainty, rising prices and the impact of Brexit.

A matter of VAT

Many other European countries, including France, Germany and Holland, enjoy lower rates of VAT on food and hospitality. The main economic reason for this can be illustrated through the following example.

Take a business which sells a physical product such as an electrical item or an article of clothing.  The company may purchase the component parts for £40, add their value and sell it onto the consumer for £100.  The VAT due to HMRC is the full tax from the sale (20% of £100) less the tax incurred from any component parts (20% of £40); which is this example would be £12.

However in contrast take a hotel room where the cost of the product to the consumer (a night's stay) may also be £100 but the value of component parts (soap, washing sheets, etc) may only reach £10.  The Vat due to HMRC in this case would be £18.

A larger proportion of the 'Added Value' in the hotel example is attributed to 'intangible services' rather than physical stuff which has been bought.  This is the case with most leisure and hospitality businesses where they are unable to offset as much of the cost in comparison to other sectors.

Marginal Opposition

One counter argument to the 'lower VAT' proposition is the observation that there is traditionally more margin earned from these 'service based products' and thus challenges "If they're earning greater margin why shouldn't they pay more tax".  We contend that in leisure, hospitality and other predominantly service businesses more costs are intrinsically required to deliver the service.  In the case of a hotel, those costs would include the receptionists, night porters, security, maintenance, chamber maids and so on.  None of this is considered in the UK, but is readily recognised and accounted for abroad.  BALPPA, the British Association of Leisure Parks, Piers and Attractions, has been lobbying for this reduction in VAT for years and we wholeheartedly agree.

Other Hopes

Beyond that, our expectation will be that the Government will offer no support on business rates, and they should do, because shockingly some operators are now paying as much in business rates as they are in rent.  

The Chancellor should certainly hold alcohol duty; again, this always seems such an easy target. Today up to 50p in every pint is tax.  Statistics recently released revealed that, in the three months to September 2017, 35 million fewer pints of beer were sold in the UK compared to same period in 2016, prompting concern over the viability of pubs.  Many pubs have already been forced to call time on their trading in recent years and the surviving ones are facing very challenging times.

There is a balance with pubs, because while less beer is being sold, we are seeing that more food is being sold, as pubs are taking the place of restaurants in some spaces, in particular the more relaxed, casual, dining space. More and more pubs are seeing the benefit of delivering a great food product and, indeed, this is the only reason why beer isn’t in even bigger decline. We hope that the Chancellor does not increase alcohol duty and perhaps even reduces it, although if this were to happen brewers may use this as an opportunity to increase their prices further.

We're here to help

Trading is becoming more and more challenging each year with increases in utilities, minimum wage costs, insurance costs and business rates.  We can typically help achieve savings of around 7% on drinks bills alone, with the additional benefit of fixed pricing, which is a way at least to offset supplier and brand owner increases.  Give us a call today and see what we can do for you.  Let's all pay less together.