Increasing VAT to 20% will mean significant price hike, says UKH boss

UKH launched the #VATsEnough campaign​ and is calling on customers, suppliers, hospitality venues and employees to lobby their MPs on the need to make the 12.5% VAT rate permanent.

This followed a YouGov poll for the trade body that found more than half (57%) of adults believe the VAT rate for hospitality should not return to the full 20% next year and almost three quarters (70%) believe the Government has a responsibility to support the industry’s recovery.

Moreover, 49% said they would eat out less frequently if prices were increased in pubs, restaurants and cafés, according to the survey.

Nicholls told The Morning Advertiser​: “We are already seeing as a result of that change from five to 12.5% is that operators, because they're facing such an intense squeeze on margin or having to pass on the VAT increase to customers in the form of higher prices so it reduces their ability to navigate through the turbulence that they're facing at the present moment in time.

“Well, you've got you've got that perfect storm at the moment where you're seeing big increases in in commodity costs, utility bill increases of, you know, 50 to 100%, double digit wage rate inflation, labour shortages and supply chain issues, which are meaning that they can't operate at full capacity.

“All of that means that you're seeing a real squeeze on the margin, and therefore they just can't absorb that at the present point in time.”

The UKH boss referred to the research conducted by YouGov on behalf of the association, citing the fact a number of pubgoers would be put off eating out if prices increased.

Damage future viability

Nicholls added: “Well, obviously, it helps to keep prices as low as possible for consumers, you can maximise that demand because consumer confidence is still quite fragile.

“Big price increases at this point in time would deter people from eating out, which obviously damages future viability and profitability of many businesses.

“The lower rate of VAT has been a lifeline to help those businesses navigate through turbulent times. We’re clearly going to see a longer-term lag of the impact of Covid and the sector as a whole has got long Covid so we need that support to be continued to maintain business viability, profitability, and to boost productivity and investment.

“We're going to see a significant hike in prices so you're going to fuel inflationary pressures across the economy, which is the biggest threat to the recovery that we've got at the moment in the short term.

“Clearly price hikes of that nature, you're looking at, you know, a significant jump in price for consumers are going to result in fewer people eating and drinking out, that's what customers are telling us. Half of consumers said they would eat out much less if the prices went up to by that extent. And that impacts on business profitability going forward.”

While VAT is top of the trade body’s list of asks, it is also calling on the Government to reform the business rates system, warning of a “cliff edge” next year.

Nicholls said: “Our number one ask that is sector specific support is that retaining that lower rate of VAT for tourism and hospitality services.

“Over and above that we clearly need to understand long term reform of business rates, but also the cliff edge we're facing from March next year when business rates bills go back in full, will be a significant hit for the sector.

“Coupled with the VAT change, [it] could be fatal for many. We want to see not only that longer-term reform, but also how do we bridge next year, when those rates bills come back in. Then finally, it's looking about how we can deliver a lower duty for hospitality businesses.”

The furlough scheme came to an end last month (30 September) and Nicholls estimated there were a small proportion of hospitality staff still on the scheme and she was hopeful this meant unemployment in the sector wouldn’t be as high as feared.

Build back better

She said: “The key hope that many in the sector had was that at the end of furlough would result in in a sort of freeing up a little bit of the labour market and it might help with some of those vacancies as workers from other sectors came back into the labour market.

“If not all of them were able to be employed by their previous employer. We're not seeing any signs of that at the moment.

“It doesn't look as though the end of furlough is going to result in the higher levels of unemployment that the Government were anticipating, and certainly doesn't look as though it's going to be helpful in terms of redressing the supply chain challenges we've got and the labour shortage challenges we've got in hospitality.”

Looking ahead, Nicholls was optimistic, highlighting while consumer demand is fragile, it is returning however, this is coupled with the recruitment issues.

She said: “The future is looking positive for the sector. Demand is there from consumers. It's the cruellest of ironies at the moment that we've got more demand than what we can cope with because of the labour shortages, if we are able to address that, that sort of recruitment challenge.

“[If] we get that longer term support from the VAT, the lower rate of VAT than the sector will be able to invest in the recovery and we'll be able to go back to generating jobs growth and investment at pace across all parts of the country, helping to deliver the Government's levelling up agenda and to build back better.

“The future could not only be rosy for the sector, but to be rosier for the economy if we are helped to grow more quickly.”

When it came to the staffing problems in the sector, Nicholls stated the pandemic gave a reset moment and advised on how the industry can solve the issues.

“It's about making sure that we are looking at ways of working and the terms and conditions so we can be an attractive employer of choice, not just for those who are looking for work, but also those who are in the businesses already so that we can retain as many of our staff as possible,” she said.

“It's about working with local schools, colleges and Jobcentre Plus, to look at redeploying people from the rest of the economy and recruiting school leavers into hospitality.

“But ultimately, the level of vacancies we've got not just in hospitality, but across the economy means that unless we can get an inflow of people into the labour market, at a large enough volume, we are going to be living with labour shortages for some time to come and that is going to impact on our ability to trade our way out of this and deliver economic growth.”