'Get ready for another difficult year' - restaurants reflect on VAT rise

Ratnesh Bagdai, co-founder of Brindisa Restaurants and co-owner of The Bailiwick pub in Englefield Green, says the VAT increase back to 20% from its reduced 12.5% rate is not great timing for the sector given the Omicron period of disturbance over Christmas and the recent food cost price increases generally.

“​While the reduced rates helped through out the crisis the industry is hardly out of the woods,”​ he warns.

“​I’m a great believer that customers should pay premium for premium casual establishments where great food and great service prevail. I am now more convinced and of the view that the customer will have to pay even more throughout all parts of the industry including in the fast-casual and QSR spaces.

"The sun may start shining soon, but get ready for another difficult year. As always the fittest will survive.”​

Operators plea for Government to reconsider VAT increase​

The rise in VAT comes 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 as both National Insurance (NI) and the Living wage increase; and a 17% and 14% rise in food and drink prices, respectively.

The trade body has warned that coupled with the VAT increase operators will have no choice but to pass on costs to consumers, with double-digit price rises expected​​.

Neil Manhas, managing director and chief financial officer at Pizza Hut UK and Ireland, is urging the Government to do more to support the sector as it recovers from the pandemic. 

“Extending the VAT cut past 1 April would have offered businesses like ours the buffer needed to counter the unprecedented levels of volatility our industry is facing,” he says.

“Unfortunately, following the Government’s decision, it is inevitable that businesses across the sector will have to pass some of this to consumers as we manage the compound challenges of inflation, keeping up franchisee and investor confidence and the rising fuel, supply chain and staff costs.

“As we look ahead, we’ll continue to work with industry bodies to find new solutions that suit our teams, our customers and our business. In the meantime, we urge the Government to reconsider its decision not to extend the VAT aid.”

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

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

Meanwhile, 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.

Absorbing costs​

Some businesses say they will look to shoulder some or all of the burden of rising costs for now, in order to maintain guest loyalty going into the spring. 

Global pizza and pasta group Vapiano, which has six sites across the UK, the majority of which are based in London, says footfall has returned at its restaurants to pre-pandemic levels. The company says it is working with suppliers to protect input pricing, as well as absorbing some costs itself where possible.

“​There have been a wealth of contributing factors to price increases - some less expected than others - including Brexit; the current war in Ukraine, which has contributed to rising cost of flour and wheat; and skyrocketing energy prices,” says Craig Goslin, UK managing director at Vapiano.

“​With the rise of VAT this year as well, it creates a perfect storm to put our industry and many businesses under strain.”

London-based pizza chain Four Hundred Rabbits, which operates five sites across the capital, has also chosen not to pass on costs to the consumer.

“​The VAT increase is a real blow on top of the NI increase, the minimum wage increase and soaring ingredients costs,” says Duncan Edwards, co-founder of Four Hundred Rabbits. 

“​We did consider putting our prices up to reduce the impact but we decide against that as our customer will be feeling the pinch too and we want to make sure that eating out or getting a takeaway is not a stretch too far for them.

“​There is a good chance that we will be another hit in the autumn with the next energy price rise and when people switch the heating on again so we are hoping to have a great summer ahead of that and then we will see what happens then.”

Chancellor 'must go back to drawing board'​

Last month hospitality businesses were left disappointed​​ after Chancellor Rishi Sunak failed to offer fresh financial support in his Spring Statement to help firms weather rising cost inflation pressures, beyond a small rise to the Employment Allowance.

Michael Kill, CEO of the Night Time Industries Association, which represents some 1,200 independent bars, clubs and live music venues across the UK, says the Chancellor 'must go back to the drawing board'.

“The Spring Statement really epitomised the very clear disengagement and lack of grass roots understanding of our industry by the Government,” he says.

“Following two years of lockdowns and restrictions, and now the uncertainty of crisis overseas and the exceptional levels of cost inflation being experienced by operators, surely this Government cannot think this mini Budget will help anybody, consumer or businesses alike.

"The industry has lost over a third of nightclubs across the UK in the last two years, and with the withdrawal of financial reliefs including VAT, and growing concern over cost inflation, as new contracts are being signed, we are set for many more businesses to be lost with jobs to follow over the next 12 months.

“Once again our industry is facing a very bleak period, the feedback from members and wider industry is that this is not sustainable, and will lead to unprecedented price increases, in an environment where customers have less disposable income.

“I would urge the Chancellor to revisit the spring Budget, as autumn will be too late for many.”