VAT cuts provide opportunity for smaller firms to stabilise

The announcement that VAT rates in the hospitality sector would be significantly reduced has been met with support by Accounting and Hospitality executives due to the relief it will provide to smaller firms.  Isobella Colletta reports

The Chancellor Rishi Sunak revealed in his summer statement that VAT rates would be temporarily reduced from 20% to 5%, with the changes coming in on 15th July 2020 until 12th January 2021. The reductions will apply to the supply of eat in and take out food, non-alcoholic drinks, accommodation, and attractions.

These VAT reductions will work alongside the government’s Eat Out to Help Out scheme, which provides customers with a 50% discount up to a maximum of £10 per head for sit down meals in restaurant and dining venues. According to Sunak, these combined initiatives will support 2.4 million staff across 150,000 businesses. 

The VAT cut is expected to save households approximately £160 per year, with the hope that this will generate greater consumer activity in the sector. Sunak also reported that 80% of hospitality businesses stopped trading in April and approximately 1.4 million workers in the sector have been furloughed under the Coronavirus Job Retention Scheme, which makes up the highest proportion of any industry.

Ryan Demaray, Managing Director at SAP Concur SMB EMEA, applauded the cuts, saying: “Many UK businesses are currently in a state of flux, trying to recover from the ongoing economic impact of the COVID-19 pandemic. For smaller businesses in particular, sustaining cash flow is critical right now. 

“The government VAT cut is a positive step in the right direction in helping businesses get back on their feet and keep as much cash as possible within the business. While many larger enterprises seem to be taking advantage of the VAT changes and passing on savings to consumers, smaller businesses need to ensure they are also maximising it to their benefit”. 

Demaray also highlighted that the government's new schemes provided opportunities for smaller businesses to stabalize themselves post-lockdown. He said “Our data highlights that on average 70-80% of European businesses are leaving VAT unclaimed and while the announcement means the overall VAT amount will decrease, businesses still have an opportunity to strengthen their financial position by simply claiming back their VAT.”

The UK government's move follows similar VAT cuts introduced by a number of European governments in the hospitality sector. On 28th May, the German Bundestag cut VAT for hospitality firms, which was followed by the Belgian government who cut the VAT rate from 21% to 6%  from 8th June up until 31st December 2020.

For hospitality firms across the UK, the reduction provides a level of financial relief. CEO of the Hospitality Professionals Association (HOSPA), Jane Pendlebury, described the governments schemes as “absolutely massive news for the hospitality industry”.

In a statement responding to the cuts, she said: “As an industry, we’ve long been lobbying for reduced VAT to bring us in line with other European countries that already offer favourable rates to help drive tourism. Given the current crisis the clamour for this within the UK has grown – and it’s fantastic to see the government respond so positively.

“The reduction will provide businesses operating on wafer thin margins with some essential breathing space, helping them to recover and rebuild, as well as to retain more jobs – with the £1,000 job retention scheme offering yet further assistance here.”