The Chancellor’s summer economic update contained targeted measures aimed at supporting tourism and hospitality businesses as they get back on their feet after lockdown.
The temporary VAT reduction to 5% is clearly very welcome for the leisure and tourism industry, though there will be various complexities for businesses to sort out.
How much of this tax cut will be retained by the businesses to increase profits (or rather reduce losses) and how much will be passed to consumers to incentivise demand will be largely market driven. Deposits will be an interesting debating point, particularly due to the time of year that the rate change has been brought in.
Our VAT team are currently working through the complexities of the scope of the 5% and have prepared useful FAQs on the implementation. The 5% rate will apply from 15 July 2020 to 12 January 2021 on supplies of food and non-alcoholic drinks from restaurants, pubs, bars, cafes and similar premises. It will also apply to accommodation and attractions.
Hotels, camping and caravan sites and holiday villages could see an increase in the level of deposits received for stays next year prior to the end of the temporary VAT reduction. This will boost cash flow at a time when it is normally at a low point in the sector, helping businesses to get through the winter. Smaller businesses should be encouraged to get these bookings in, and offering a 15% reduction on whatever is paid could be a significant incentive to potential guests.
When combined with these other measures, a 50% discount on meals out in August – up to the value of £10 on a Monday to Wednesday – will also help to drive bookings as pubs, cafes and restaurants try to woo customers back.
Government support with the wage costs of employing staff previously on Universal Credit will make it more viable for leisure and tourism businesses to take on new employees as demand picks up.
Profit margins could improve as a result. A meal that sells for £20 typically costs £7 in wages to serve, £5 in food and £5 in other costs, leaving £3 of profit. In theory, a business could now make a profit of £10 on the same meal, plus the VAT saving if this is retained, not to mention any extra that the customer spends because they are getting a £10 discount.
Clearly life is never that simple, but you can start to see how these measures might come together to help businesses recover, albeit in a socially distanced and capacity limited environment.
Whilst the package of measures to stimulate demand will be welcome, in many cases the biggest challenge for businesses is on the supply-side, as establishments have to operate at reduced capacity to comply with social distancing rules. So rather than price cuts being used to drive demand, the VAT cut may be reflected in improved profit margins.
Whether this gives enough breathing space for businesses to rebuild, or simply creates a new cliff-edge when the VAT cut is due to be reversed in January 2021 remains to be seen.