Sunak extends reduced VAT for hospitality sector till March 2021

Summary

• The chancellor Rishi Sunak extended the period for reduced VAT from 20 to 5 per cent for the hospitality and tourism sectors until end-March 2021.
• The measure is likely to protect around 2.4 million jobs in the sector.
• The VAT cut extension would provide support to more than 150,000 businesses through the winter period.
• Hospitality sector associations ask for additional support measures to stop businesses from failing.

The UK government brought another respite measure for the hospitality and tourism sector, one of the worst hit by the coronavirus-led crisis. On 24 September 2020, the chancellor Rishi Sunak extended the value added tax (VAT) rate relief for these sectors.

Announcing the extension of the time period, the chancellor mentioned that the temporary reduction of VAT rates from 20 per cent to 5 per cent would now be applicable until 31 March 2021. The measure is expected to protect approximately 2.4 million jobs through the winter. In addition, Sunak stated that the extension would provide support to more than 150,000 businesses during this period.

It is to be recalled that in his summer statement in early July 2020, Sunak had announced a £4 billion VAT reduction for the hospitality and tourism sectors valid till 13 January 2021. The temporary reduction in VAT rates that became effective from 15 July 2020 was structured to assist the hotels, cafes, restaurants, and pubs to bolster their strained finances. It was noted that many hospitality firms reduced their prices and passed on the savings to their customers.

The coronavirus lockdown has affected the business of restaurants and pubs, resulting in thousands of job losses in the sector. As per the Winter Economy plan of the Treasury, the decreased VAT would be applicable on food and non-alcoholic drinks, besides accommodation and admission to tourist attractions across Britain. Sunak informed that the extension would cost the Treasury £800 million above the earlier estimate of £2.5 billion.

Views from trade bodies

Welcoming the Vat cut extension, UKHospitality, a sectoral trade association commented that it was good news for the industry, especially after restrictions were imposed on the pubs and restaurants in England to close at 22:00 BST. The association had pushed hard for it as it considered VAT cut was much needed and felt that it must be further extended. Longer tax deferrals and the option for longer loan repayments would provide required breathing room for employers, explained the association.

However, this was not sufficient and without any further support measures, around a quarter of businesses in the hospitality sector could fail during next three months. The pub and hospitality trade bodies, including the British Beer & Pub Association, UKHospitality, and the British Institute of Innkeeping revealed the findings of a new study. They stated that due to the new restrictions imposed by the UK Prime Minister, Boris Johnson, the sector could see additional loss of around 540,000 jobs.

The survey was conducted by hospitality market research company, CGA, and included the members of the three trade associations. The study presented that almost 23 per cent or a quarter of their members believed that their businesses would fail before year-end without further government support. This was prior to the new restrictions announced earlier this week by the British PM for restaurants, pubs, and the larger hospitality sector. The restrictions included a 10 pm curfew and services only on the table are likely to worsen the situation.

The survey also stated that one in eight hospitality staff has already been made redundant. With the government’s furlough scheme ending in October 2020, more jobs are likely to be axed. Many businesses believed that on an average their staff strength would be 25 per cent lower by February 2021 as compared to February 2020. This would account for a decline of 675,000 jobs lost from the sector in a year.

On the other hand, around 7 per cent of the members mentioned that they were optimistic regarding the prospects of the hospitality sector over the next one year. This level is a drop from 23 per cent in August 2020 and 19 per cent in July 2020 when the participants were asked to respond to the same query.

The trade bodies requested the government to take necessary steps, including a new sector-specific employment support package and to extend the VAT cut and business rates holiday for the sector. These measures would help the sector towards facing any new challenges and recover faster.

Eat out to help out scheme

In order to increase consumer demand after reopening the pubs and restaurants, Sunak had launched the ‘eat out to help out’ plan that continued for the entire month of August 2020. The Treasury informed in early September that more than 100 million meals were claimed under the scheme. The scheme additionally helped to surge the booking at the restaurants. Under the scheme, diners were offered a state-backed 50 per cent discount on meals and soft drinks up to £10 each on Mondays, Tuesdays, and Wednesdays.

However, some experts believed that the scheme was a distant memory as the job retention scheme was approaching its fag end. The experts also seemed worried with the recent spike in the number of Covid-19 infections in Britain. Given the discomfort that the hospitality sector is in, the prospects of a quick recovery and further job losses are scaling upwards. They stressed that the VAT cut extension would not bring the desired results.

Recent job losses in the sector

The sector has seen a series of job cut announcements due to the impact of the coronavirus-led crisis. Let us have a look at some recent announcements:

On 22 September 2020, Whitbread, which owns Premier Inn and Beefeater, said that around 6000 of its workforce are expected to lose their jobs due to fall in the number of guests.

In August 2020, Pizza Express cautioned that approximately 1100 of its staff could lose their jobs. Pizza Express has restructuring plans and is likely to close 73 of its outlets.

In June 2020, The Restaurant Group that owns Frankie and Benny's stated that it was axing up to 3000 jobs.

The decision to extend the reduced VAT for another six months is an effort to bring respite to the hospitality and tourism sectors, badly hit by the coronavirus-led crisis. Besides providing the required support to more than 150,000 businesses, Sunak’s intention is to support 2.4 million jobs in the sector. A recent survey of the members of three leading trade bodies from the sector suggested that in the absence of further government support almost a quarter of their businesses would fail before end. It is to be noted that the UK PM in this week announced a 10 pm curfew and services only on the table for restaurants, pubs, and the larger hospitality sector. The restrictions are likely to worsen the situation and it would be interesting to see the assistance that the reduced VAT would bring to the sector.