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Will the 5% VAT rate help the tourism, leisure and hospitality sector?

Will the 5% VAT rate help the tourism, leisure and hospitality sector?

Wednesday, 15 July 2020

It will come as no surprise to many who have attended previous presentations by me, that I for one am delighted at the news of a reduction in VAT for the Tourism, Leisure and Hospitality Sector. Clearly though, the purpose behind my years of challenge was to see a boost in the UK economy and a greater competitive edge against many of our European neighbours. Right now, though, this VAT reduction on accommodation, attractions and “eat out” food could be the difference between survival and failure for many businesses in these sectors.

The revised regulations are not perfect and, in my view, have missed (at least at the time of writing) some key elements of the sector, particularly to our area, such as the accommodation focused Broads Cruisers, which, other than innocent oversight, I cannot believe were deliberately targeted to be excluded – and so the work goes on.

We recently produced a survey of key businesses in the sector (link here) and asked what difference a reduction in VAT to 5% would make. Fifty-three percent indicated that such a reduction would help reduce the losses created by COVID-19, both in lockdown and reduced capacity on opening, but would not help them break even. A further 32% indicated that with such a change, they might achieve breakeven. While good news, this hardly creates cause for celebration, whether at 5% or not!

With so much media coverage, there is potentially a consumer expectation for a lowering of prices to reflect this saving, but the question is whether that’s the right move for the businesses themselves. As indicated, the impact of lockdown has hit businesses in the sector hard. While the easing of restrictions and re-openings have been very welcome, using a phrase from Winston Churchill, “This is not the end, this is not even the beginning of the end, but it is perhaps the end of the beginning.” The ‘three winter effect’ will have an impact on the majority of businesses in the sector, and the losses already incurred will take time to address, let alone those arising from enforced underperformance right now. Into next year there are going to be ongoing risks, both via the economic trends as well as ongoing consumer sensitivity, particularly if there are any second spikes or local lockdowns which may make people even more cautious.

So what should businesses do? The answer is, it depends! If your business is at capacity (its new capacity, that is) and income remains limited, then price reductions, in my view, should be minimised. You as a business will need the added help of the reduced VAT element for that prized income. For those not at capacity, and capable - with economies of scale to welcome more visitors - then making yourself more attractive by lowering prices may help. But it is a balancing act. The “eat out to help out” programme announced on the same day as the VAT cut is clearly targeted to add demand for eating out, at a time when demand in tourism-driven areas is already high. As unpalatable as it may seem, I would suggest businesses hold back on reductions to help themselves survive, and maybe look to drive spare capacity in the shoulder months, when maybe spare capacity could be seen, and lowering prices would drive additional demand. Had this reduction occurred in 'normal times', the Government's driver would be to seek price reductions. We have not had those noises this time, which means it's for the businesses to decide.

We should also not forget that some of these options are not available to some entities. For example, many charity-based attractions’ entrance fees don’t carry VAT within their gate prices, so will be indifferent to the fluctuation in rate.

The Chancellor, Rishi Sunak, is keen to stick to his timelines, and his adamant stance that furlough will not be extended beyond 31 October is potentially a sign that neither will he extend the VAT reduction rate beyond 12 January 2021. This would be a pity, in my view.

While I am discouraging a price adjustment right now to save as many businesses as possible into the new year, if the scheme were to be extended, at that point I would be encouraging businesses to consider pricing amendments to balance demand. This would help the sector overall. Some specific areas have seen a period of decline, particularly the casual dining arena, and therefore need to encourage us to spend. If we can put an end to the excuse that it’s cheaper abroad, this may well encourage people to stay in the UK; that enhanced staycation demand will benefit the economy for years to come and may well be a key driver in bringing the country out of the recession which many are predicting.

Chris Scargill 

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