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What impact would further VAT restrictions have on the Hospitality sector?

With the great news of the road map to freedom and reopening of hospitality now announced, we all hope that some trade can start from the 12 April, followed by the further opening of many hotels and restaurants from 17 May.

As a firm, we have produced many projections on trading scenarios and are now completing audits and accounts for businesses which have experienced the most difficult period in their trading histories.

The business support measures that were quickly put in place appear to have largely paid off, with thousands of jobs having been saved through furlough; helping businesses open up efficiently when the time comes. However, this has still come at an enormous cost to those businesses which have largely been prepared to play their part to keep a loyal workforce through taking on significantly higher debts.

In hospitality and tourism, the main initiative that has been the saviour of the businesses themselves has been the VAT reduction. The reduction to 5% has ultimately added 15% to turnover of businesses in the sector which has been vital in partly recouping income for the periods where costs far outweighed incomes due to the various lockdowns.

Our own database of bed occupancies illustrates why it is so important that this should be continued through the remainder of this year. With the third lockdown starting in early January, through to the earliest potential reopening date of 17 May, this equates to just over 30% of overall occupancy for the year (based on the same period in 2019).

Despite the outlook for the main trading season looking positive, subject to the roadmap being followed through, most businesses will need to see an extension to the reduced VAT rate through the remainder of the year to make sure they can manage costs next winter.

To help put the reduced trading into perspective, the average profit achieved by hotels is less than half the occupancy reduction from being effectively closed to mid-May. Therefore it will take a prolonged period of reduced VAT rate to recoup this.

Most hotels have had to take on additional debt (generously backed by government guarantees). Therefore, a sustained period of trading well with stronger profit margins as a consequence of continued reduced VAT rates will undoubtedly aid the ability of businesses to repay these debts and make sure they can progress confidently into 2022.

Tom is a partner in the Truro office of PKF Francis Clark with expertise in the tourism and leisure industries. Tom’s leisure sector clients are… read more
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