Beyond the balance sheet

Why the hospitality trade doesn’t need a VAT cut

Matthew Wyatt 03/2/2015 5 minute read

Matthew Wyatt FCA argues a VAT cut is the wrong area of focus for the hospitality trade in the lead up to May’s general election.

With an election just around the corner, the hospitality industry is keen to influence the manifestos of all the political parties.  So what does it want, and most importantly, what does it actually need?

More often than not when it comes to what people want, their default is to choose the least painful quick fix solution. Unfortunately that’s not always what’s best for them. In this instance the hospitality sector has proven to be no exception to the rule. Rather than a VAT reduction, what’s actually needed is a longer term vision which the trade may find is a difficult pill to swallow.

What the industry wants   

The first plea is for a reduction in VAT for serviced accommodation from the present 20% to 5%. The basis for this is based on the lower rates of VAT being charged by other EU countries, and especially by our nearest competitors. France charge VAT at 10% for hotel accommodation as do Spain and Italy. 

The result has been a significant amount of time and money invested in the Cut Tourism VAT campaign, particularly by the holidaymaker attraction sector with some support from hotels. This will, no doubt, be exacerbated by the election of Nick Varney (Chief Executive of Merlin Entertainments) as chairman of the British Hospitality Association. However, the argument for a reduction to five per cent is based more on hope than logic. It’s noticeable, too, that few major hotel companies are adding their voice to the campaign.

The second plea involves the ever-energetic Tim Martin of JB Wetherspoons fighting a surely hopeless battle with the aid of another VAT campaign run by Jacques Borel, to reduce tax on pub drinks. Again, this will never happen just as the hopes for a cut in VAT for restaurant meals fell on deaf ears and were wisely abandoned a long time ago.

Why a VAT cut won't happen

Both campaigns are I’m afraid doomed to failure. There just isn’t a strong enough case to justify them. Let’s look at how the sector is fairing to understand this. The London hotel industry is busier than ever, highly priced and highly profitable; investment is pouring in.  No-one can seriously argue that it needs any form of state aid or help. 

Business in the provinces is not so buoyant but is not so bad that it will persuade any government to bring in legislation that favours the hotel industry; doing this would immediately lead to pleas for similar treatment from other sectors and just add to the Treasury’s headaches.  

That then brings us on to the state of the nation’s finances. Public debt stands at 90% + of GDP. Whilst the deficit (the government’s annual expenditure compared to it’s tax revenue - the over spend) has reduced from £150.1bn at the height of the economic crisis in the 2010 calendar year to £98.3bn in 2013, the government has an income issue that has prevented it from fulfilling it’s forecasts.

In the Autumn Statement 2014 tax receipts were revised down by £7.3bn to 25.3bn. As the graph below demonstrates, that’s a long way off their initial predictions back in 2010. The reason for this being whilst we are seeing more people in jobs, anaemic wage growth has hit the tax intake. Then factor the demographics of an aging population with their increasing health needs and the pressure this is putting on the NHS and social care will require greater expenditure moving forward.

Basically the Treasury needs every penny of tax revenue it can get its hands on. Hardly the environment to be gifting tax cuts to an industry that is in anything but dire straits.

UK tax receiptsIt gets worse when you look at the breakdown of HMRC's tax revenue by source and see the key role of VAT in terms of the treasury's finances. According to the ONS statistics for the 2013/14 tax year, VAT accounted for £104.7bn in tax revenue. That represented 21.4% of the total tax take and came third on the list of sources behind NICs at 107.7bn (22%) and income tax at £156.9bn (32%). 

Even if the government did accede, there is no guarantee that this would lead to lower prices. The suspicion that some of it (or even all of it in some cases?) might not be passed on to the consumer but would go towards boosting profits (no bad thing in itself but not the main reason for a tax cut) is likely to be uppermost in the official mind.

What the hospitality sector actually needs

There are far more sensible requests that the industry should make. To begin with, more government support to raise productivity and improve skills would yield better results than any VAT reduction. As we wrote in a previous piece the hospitality trade needs greater productivity to offset rising payrolls.

Recruiting and retaining the right staff with the necessary knowledge and skill sets is vital to this and employers must therefore invest in training to develop their existing employees so that they fulfil their potential. After all it is staff that create the customer experience and consequently drive sales. Businesses that succeed tend to have a low turnover of people.

In hospitality that means you see the same staff and faces at the hotel or restaurant you're visiting. The present Big Hospitality Conversation is a useful means of raising the industry’s profile among school leavers and others. If the people we employed were better trained, better paid and, thus, more productive, then would we need to recruit quite so many of them as we currently do?  

There are plenty other measures that would yield good results. A more favourable business rates regime and more helpful capital allowances would encourage small operators to invest. This would help them develop and expand, it would also be of significant benefit to businesses in the provinces.

Underfunded Local Enterprise Partnerships are mere tokens of government support. Few of the partnerships have had any impact on their local hospitality industry at a time when, for many, tourism and hospitality is one of their chief economic drivers. They should be empowered further. 

Less legislation would also benefit businesses across the board. Despite the government’s stated intention to cut red tape, more and more rules and regulations come into force every year, particularly in the areas of employment and food safety. Getting these longer term measures onto political manifestos may be difficult but would be preferable to a quick fix cut in VAT which is just never going to happen.

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