Last week, the chancellor surprised everyone by announcing a £4bn VAT cut for the hospitality and tourism sector, but how will it work, and how can businesses get the most from the changes? 

What’s the deal? 

Standard VAT rate is currently charged at 20% applying to the majority of food, accommodation and attractions. The Government has announced that for the next six months, VAT relating to the hospitality and tourism sectors will be cut down to just 5%. The scheme is set to begin on July 15th and continue until January 12th 2021. In the first scheme of it’s kind in nine years, these changes are being brought in as a response to the coronavirus pandemic to support businesses severely affected by forced closures and social distancing measures.

Who can benefit from this? 

Both independents and larger chain-restaurants are expected to benefit from the cut, which is set to provide a discount on everything from meals in restaurants, cafes and pubs, and hot takeaway food to attractions such as cinemas, theme parks and zoos. The reduced rate could mean a huge range of savings for consumers and businesses alike, and the hope is that the cut will encourage members of the public to venture out and begin to put money back into the hospitality industry, where they may not have done beforehand.

It’s unclear exactly how businesses should take advantage of the changes, and for those that have experienced substantial losses over the past few months, the cut could also be used to boost profits by keeping headline consumer prices the same and pocketing the VAT saving. According to the resolution foundation, in this case the cut will “have a dual effect of boosting consumption in those sectors when it reduces prices, and giving cash to struggling businesses when it does not”, spreading the reward more evenly.

After such a difficult time for the hospitality sector, it seems reasonable that the cut should not disproportionately benefit consumers. In some cases, businesses may even choose to increase prices all together.

How will it work for takeaway food?

Most hot takeaway food and drink will be temporarily reduced rated. Cold takeaway food and drink is zero-rated, as long as it’s not of a type that’s always standard-rated, such as potato crisps, sweets and some beverages. While hot takeaway drinks are temporarily reduced rated as long as they are non-alcoholic. 

What about service charges?

If you take a service charge, it remains standard-rated. But if the customer freely gives a tip above your total charge, no VAT is due on the tip.

What are the concerns?

The announcement has been met with mixed reviews, particularly in response to alcohol being ineligible for the cut. A short VAT cut is likely to help stimulate the economy but some are worried that the encouragement to eat out will make social distancing harder and the virus will start to rise, causing doors to close again. 

However, most hope that these changes are a signal that bars and restaurants are safe and ready to welcome back the public, as well as giving business owners the confidence in knowing that reopening is going to be worth-while. 

What else is happening?

The government has also announced ‘Eat Out to Help Out’. This scheme will entitle every diner to a 50% discount of up to £10 per head on their meal, at any participating restaurant, café, pub or other eligible food service establishment. The discount can be used unlimited times and will be valid Monday to Wednesday on any eat-in meal (including non-alcoholic drinks) for the entire month of August across the UK. All participating establishments can expect to be fully reimbursed for the 50% discount.

As part of the package, the chancellor also revealed a £9bn furlough ‘bonus’ scheme, which will reward employers who bring back furloughed employees when the government’s coronavirus job retention scheme ends.

Find out more about the recent changes here: Vat reduced rate guidance

How do you feel about the VAT cut? Do you think it’s going to benefit you and your business? Tell us below.