'Catastrophic' VAT rise to mean double-digit price increases for consumers

Tomorrow (1 April), VAT in hospitality will rise from 12.5% to its pre-pandemic level of 20%, at the same time as the sector is forecasting cost inflation running at 18%. 

Recent business surveys by UKHospitality show the industry is facing a 95% hike in energy bills, 19% in labour costs, and a 17% and 14% rise in food and drink prices, respectively.

Keeping VAT at 12.5% would have supported operators trying to absorb this tidal wave of cost increases, the trade body says, adding that raising prices at this time is expected to 'wreak havoc' on consumer demand and could lead to a wave of business failures.

“Given the unfolding cost-of-living crisis for consumers and soaring operating costs for businesses the return to 20% VAT for the sector will prove nothing less than catastrophic,” says Kate Nicholls, chief executive of UKHospitality. 

“The now inevitable price rises for consumers will dampen demand and many hospitality businesses – one in three having less than a month of cash reserves and most are carrying heavy debt burdens – will fail as a result. This can only cause the UK’s wider economic recovery to falter.”

Calls for the 12.5% rate of VAT to be retained beyond the end of March have not just come from within the sector.

Earlier this month, the All Party Parliamentary Group (APPG) for Hospitality and Tourism wrote in a report that VAT should not return to 20%​​ in April, citing UKHospitality data revealing that the lower rate would bring benefits including jobs, international competitiveness and social wellbeing.

While a recent survey by the trade body found 79% of adults believe the rate of VAT should remain at 12.5%​​, with 72% believing the Government should aid the hospitality sector’s post-pandemic recovery.

“If the sector is to have any hope of playing its full role in fuelling the UK’s recovery then we need support,” adds Nicholls.

“We will continue to work closely with government to achieve the best possible trading conditions for the industry, keep pushing for reform of fundamentally unfair and crippling business rates, play our role in solving our workforce crisis and persist in making a case for the clear benefits a permanently lower rate of VAT will have. A move which has support not just from UK consumers but a significant number of MPs as well.”