Double whammy of extra VAT nd end of furlough for the Hospitality Industry

As we move into October, not only has the furlough scheme come to an end but also the 5% vat rate applied to the hospitality industry.

Much has already been said on the ending of furlough and we remain concerned as to what impact this will have in the coming months, but today we are turning our attention to the increase to 12.5% vat for the hospitality industry. This interim rate will apply until the end of March next year so what are the likely outcomes?

Before looking to the next six months we think it important to reflect on the last 14 months since the 5% rate came into effect on 15 July last year. If hospitality businesses simply reduced the vat rate applied to their customers’ bills then the new rate should not affect their margins, except that the need to increase prices with the additional 7.5% vat from 1 October may well affect customer demand and hence impact turnover.

So what does the short term future look like? Sadly, our view is a pessimistic one.

We believe that consumer confidence is falling due to spiralling energy prices, the Bank of England warning that inflation is likely to hit 4% this year, meaning further price increases are to come and the risk to job security that the ending of furlough will bring to many. Given that hospitality is a discretionary spend, these factors will inevitably have a significant impact on the sector.

We are not sure how many businesses actually reduced their prices to reflect the lower vat charge. We believe the majority of businesses kept prices the same and, in effect, used the vat differential to shore up their finances to help see them through the pandemic. Those businesses are now facing a dilemma – do they accept the loss of the “subsidy” and try to make ends meet operating on a reduced profit margin or do they increase their prices?

We fear that consumers will not welcome price increases at this time and so margins are going to be impacted in those businesses that have enjoyed the “subsidy”. If the ending of furlough brings a swathe of job losses then turnover in the sector will also be hit at a time when both fixed and variable costs are all rising.

On the plus side, there are hospitality jobs available across the country with some businesses currently operating on reduced days/hours to give their staff a rest. However, due to so many people leaving the industry during lockdown, there has been significant wage inflation in the sector which is another hit on margins. Whilst partial closures has the benefit of reducing their variable costs, their fixed costs remain the same and we feel that for many businesses these increasing costs will be their downfall.

We do feel that we may come across overly negative when it comes to our view on the economy and so would welcome your comments and opinions.

If any of our contacts are involved with, or knows of anybody in hospitality businesses that may be facing these challenges, we would urge them to act decisively and seek independent professional advice and that is why we are always available for an initial zero cost assessment which can be arranged by contacting Alistair Dickson or Mark Phillips.