VAT cut meant to help the trade

Operators should maintain pricing and use the VAT reduction to aid their business, writes accountant Martin Johnston

The VAT reduction should be used to benefit hospitality businesses, according to Martin Johnston

THE chancellor’s summer statement described a reduction in VAT for businesses in the hospitality sector.

In broad terms, this is a reduction in the VAT chargeable from 20% to 5%. This applies to food, non-alcoholic drinks, hot takeaway food, hot takeaway drinks, hotels and holiday accommodation. The change to the VAT rate applies from July 15, 2020 to January 12, 2021.

The first challenge for businesses is updating their own systems to reflect the reduced rate. This may involve updating till systems, invoicing systems and book-keeping software.

There are a few other areas that businesses in this sector need to be aware of.

For restaurants offering deals which include a meal and alcoholic drink for a single price, they will need to apportion the deal price between the food element at 5% and the alcoholic drink element at 20%.

For any businesses operating the Flat Rate scheme for VAT, HMRC is adjusting the rates to reflect the reduction in VAT rate.

Whilst an average saving of ‘£160 per household’ had been headlined on the back of this reduction in VAT, the Treasury has subsequently recognised that this also needs to be measured against hospitality businesses having been without income for months, so it would be their decision whether to pass this ‘saving’ on to customers.

Why the mixed messages?

A reduction in the VAT rate doesn’t mean businesses will reduce their prices, nor should they feel they have to.

When we’ve seen changes to VAT rates in the past this doesn’t always lead to changes in price to customers.

The right price for goods and services is ultimately what someone is willing to pay for them according to the availability of supply versus the demand for those goods and services.

The availability of “supply” to customers is being hampered by a number of factors: businesses struggling to open safely, longer changeover periods and reduced capacity in restaurants and bars.

We’re also approaching what should be the busiest time of year for many businesses in the sector.

In terms of “demand”, there’s a pent up desire for drinks and eating out arising from the lockdown period.

Combine this with a reluctance to travel and the ‘Eat Out to Help Out’ scheme, we should see a strong demand for hospitality services.

Taking all of this in to account, in my view, hospitality operators should keep their prices at the normal rates in the short-term.

The reduction in VAT rate should be used to benefit the businesses which have been hit hard in this sector and recoup some of the losses over the past few months.

Given time, we may see businesses reduce their prices to attract customers and the VAT rate cut provides a greater latitude for doing this.

However, most hospitality businesses already flex their rates with deals and offers during the quieter winter period and that’s when businesses can take advantage of the VAT rate reduction.

Having talked to a variety of businesses in this sector, some customers are seeking reductions in price following the VAT rate cut.

My response to those customers is simple: businesses in the hospitality sector have had to endure months with little or no income.

The VAT rate cut should be used to help these businesses survive and replace what has been lost over recent months. The Eat Out to Help Out scheme provides discounts to consumers and they should make use of that.

Martin Johnston is audit director at Armstrong Watson LLP.