What their owners need to know about VAT arrears

Restaurant and pub owners could be forgiven for thinking that they’ve been the victims of a tremendous April Fool’s Day prank when it was announced that from April 1st VAT for the hospitality industry was rising to 20%.

As part of the response to the pandemic, VAT for the hospitality industry was first reduced to 5% in July 2020 where it remained until October 2021 when it was raised to 12.5%. 

Many industry heavyweights including JD Wetherspoons, UKHospitality and the British Beer and Pub Association petitioned Chancellor Rishi Sunak to either keep the reduction in place for longer, if not permanently or take other additional support measures in the Spring Statement to help offset the rise. 

In the event neither was forthcoming which prompted a strong response from Kate Nicholls, Chief Executive of UKHospitality

She said: “This is a real setback for thousands of UK hospitality businesses still suffering the devastating effects of Covid, and facing a tidal wave of rising costs. 

“For many businesses, the removal of the lifeline of a lower rate of VAT might prove fatal. 

“For a heavily, disproportionately taxed sector a return to 20% dashes the hopes that many businesses could begin to recoup some of the losses of the last two years. 

“Small and large operators in the sector have several hurdles to clear on the road to recovery: huge accumulated debts; unprecedented rising costs for energy and raw goods; a chronic shortage of staff and a fundamentally unfair and crippling business rates regime we’re desperate to see reformed. 

“Locking in VAT at 12.5% would have given hospitality businesses a major boost and helped the sector in its ambition to lead the UK back to post-Covid prosperity. 

“As it is, thousands of jobs could be lost and already hard-pressed consumers in the midst of a cost of living crisis will see price rises in their favourite pubs, bars and restaurants, further fuelling inflation.”

Emma McClarkin, Chief Executive of the BBPA said: “The rise in VAT is anticipated to cost our sector more than £500 million – a cost businesses will be forced to make back elsewhere.

“With energy prices soaring and uncertainty around supply chains due to the Ukraine crisis, the cost of doing business in 2022 is fundamentally different from 2019 and pubs and brewers will still be under immense financial pressure.”

More data from the Office for National Statistics in their most recent Business Insights and Conditions Survey (BICS) underlines the size of the challenges facing hospitality businesses at the moment. 

Like many businesses, those in the food and beverage sector are going to be affected by the recent confirmed rise in energy prices with 60% reporting that they have seen an increase in their bills, compared to an average of 38% across all industrial sectors. 

The research also indicates that businesses in the hospitality sector are twice as likely to be susceptible to higher transportation expenses, increased red tape costs and rises in the prices of goods and services they import. 

They’re also more likely to suffer the negative effects of supply chain issues and have more difficulty recruiting staff due to ongoing labour shortage issues across the economy. 

Chris Horner, Insolvency Director with BusinessRescueExpert, said: “It’s hard to imagine any industry having a harder couple of years than hospitality. 

“Dealing with the pandemic, the subsequent lockdowns, changing customer behaviour that will negatively impact turnover, increased energy bills without the domestic price cap to limit rises, increases in ingredients and the length of time it can take to get them and now a 7.5% VAT rise just for them.

“The stamina and mental strength required to continue is inspiring but even this might not be enough for some pub and restaurant owners and directors if these cumulative blows prove to be too much to handle at once.

“This is why they should look to get some professional advice while they can to see if there is a possible way for their business to survive and eventually thrive once more.

“And if there isn’t a viable way forward then they will know before they spend additional money, time and energy chasing a goal that would be unobtainable.”

We offer a free virtual consultation to any director or business owner of a hospitality business or any other sector that they can arrange at any convenient time for them. 

Together we can explore what options are available to you immediately and in the longer term and advise on what other changes you could realistically make to give your business the best chance of being able to make a profit and delight customers once more.