As the hospitality industry faces rising costs, some are warning that a VAT hike from Friday will force them to raise prices for customers.
“Everything comes at once,” says Clive Watson, chairman of the City Pub Group chain, which has 45 establishments across England and Wales.
He says the industry is dealing with a “minefield” of challenges, including rising food and energy costs and increases in Social Security payments, also effective from April 1.
The VAT rate – the tax payable on the purchase of goods and services – has been reduced for the tourism and hospitality sector since July 2020 to help it recover from the effects of the Covid pandemic.
However, starting Friday, it will increase from 12.5% to 20% and return to the normal rate.
The Treasury said it had “always been clear” that lower VAT rates were a temporary measure to help reopen industries hit by Covid restrictions, adding it had “standing behind hospitality” throughout the pandemic .
But Mr Watson argues that now is not the time to raise taxes.
“I know the chancellor needs to get the money back to pay for Covid, but he shouldn’t stifle industries that have suffered so badly,” he says.
“As companies try to get out of Covid, many of them will simply be left behind because of this cocktail of cost increases.”
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Watson said his pub chain already hiked drink prices by 4% earlier this month due to cost pressures and plans to increase food prices by an average of 7.5% from April 1 to reflect the increase in VAT.
Even those increases won’t cover the chain’s increased costs, he says, but the company doesn’t want to discourage customers from returning to pubs after the pandemic.
“We just couldn’t increase our prices by 10% because that would be too daunting,” he says.
“But at the same time with all these additional costs, we have to try to win back some of the lost sales through price increases.”
Industry body UK Hospitality has warned that the increase in VAT “will constrain the sector’s efforts to stifle price increases for customers”.
“For many businesses, removing the lifeline of a lower VAT rate could prove fatal,” Chief Executive Kate Nicholls said last week.
Bakery chain Heidi, which operates six branches in the south-east of England, is also planning a price increase due to the increase in VAT and recently put up signs in its shops explaining this step to customers.
As the bakery faces rising costs for everything from butter and eggs to energy, chain director Rory Shanks says the sales tax hike “really couldn’t have come at a more difficult time.”
“While the lower VAT rate was intended to ease our industry’s restrictions due to the coronavirus, more recently it has also helped protect our menu prices from rising along with our costs,” he says.
With the public also feeling pressure on their budgets from the rising cost of living, Shanks says his company will be closely monitoring how customers react to the price hikes.
“I think our customers raised a bit of an eyebrow at the time of this VAT hike, knowing the challenges the industry has faced over the past few years,” he says.
“But alongside the general pragmatism about the situation, I think they’re reassured to know that we will also use any increases to fund more wages for our teams that they interact with on a regular basis.”
He describes the decision to raise prices as “a difficult balancing act” and says the company is also looking at other ways to deal with tax increases. That includes working with suppliers to push for lower costs and aligning its products to use ingredients that are more widely available, he says.
However, not all companies react to the increase in VAT with price increases.
Tom Ross, operations director at hotel chain Pig, says room rates are set in advance and change at different times of the year, so the company doesn’t plan on rate increases specifically linked to the sales tax hike.
Menus at the chain’s restaurants change daily and Mr Ross says prices are more influenced by the produce they receive from suppliers.
However, with the company facing many of the same challenges as the rest of the industry, he still believes now is not the time to raise sales tax.
“All of our suppliers write to us that prices are going up and I think one of the things that’s going to happen is that people will have to raise their prices in the restaurant sector,” says Mr. Ross.
He says the chain has been “very lucky” and has been busy since reopening after lockdown, with the mostly rural locations of its eight hotels proving popular with customers.
However, Mr. Ross is well aware that other hotel chains, such as B. event-focused venues in the city center are still struggling to recover from the impact of Covid.
“There are many who are far from where they were before the pandemic.”
In a statement, the Treasury said: “We have stood behind the hospitality sector throughout the pandemic with a £400 billion package of economy-wide support that has saved millions of jobs.”
From Friday, eligible high street businesses can take 50% off business rate invoices.
Additional reporting by Jennifer Meierhans
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