Level of VAT paid by pubs branded 'extraordinarily demoralising'

As the sector continues to battle rising costs and closures, The​ Morning Advertiser (MA​) has looked at how impactful a VAT reduction, which has longed been called for by industry leaders, would be ahead of the Budget, set to take place on Wednesday 30 October.

Earlier this week, new figures from accounting firm PwC revealed more than two chain pubs closed per day during the first half of the year.

The research referred to pubs being particularly exposed to energy and labour cost hikes combined with lower consumer demand as a result of the cost-of-living crisis alongside the trend of younger consumers drinking less and older customers drinking at home.

Managing director of the Three Hills at Bartlow in Cambridge, Emma Harrison, told The MA ​each closure was a loss for the “community, jobs market and economy”.

She continued: “Many of these pubs will have been well run successful businesses, bowing to the pressure of a tsunami of cost increases that have made their business unsustainable.

“The pub industry is vitally important to the UK economy. We employ large numbers of people – often for their first job.

“We play a valuable role in supporting the local community, contribute massively to both the local and national economy and are an integral part of British tradition and culture.

“In short, we are at the heart of what makes this country great, with an entrepreneurial beat driving everything we do.”

Significant disadvantage

Harrison added UK pubs operate at a “significant disadvantage” to our European neighbours.

She said: “Only Denmark has a higher VAT rate for hospitality than we do, and many have hospitality VAT rates at half (or less) than the rate we pay.

“Every other country in Europe has recognised food led business must have a lower VAT rate – in recognition of the fact there are no VAT inputs to offset the 20% we pay on all our food sales.

“This means we pay an extraordinarily high effective tax rate – which is also extraordinarily demoralising.

“Without a significant reduction in VAT [in line with] our European neighbours we will continue to struggle, and many more well-run pubs operated by hard working people will leave the industry.”

The PwC figures followed data from Oxford Partnership earlier this year (July), which showed 84 outlets in the hospitality sector were lost​​ from 1 June to 6 July, with suburban and urban areas hit the hardest.

Additionally, Lumina Intelligence’s latest UK Pub & Bar Market Report ​predicted closures in the pub market are set to be steeper than pre-Covid levels​​ this year, driven by a range of contributing factors including business rates, alcohol duty and staff wages.

Owner of the Onslow Arms in Loxwood, West Sussex, Rob Barr told the MA ​a 10% reduction would be “highly impactful” and help stimulate growth for both the economy and the hospitality industry.

He said: “As a growing business we could accelerate growth plans and continue to support in making hospitality a vital asset to the economy and local communities.

“Pubs are constantly fighting challenges, whether it be Covid, cost-of-living, inflation etc. we have had to dig deep in order to keep our doors open.

“For centuries, pubs have been the staple of British culture and communities, we are at risk of losing even more.”

Barr added the Government needed to start “looking forward” and “inspiring conversations” about future growth, adding it needed to unshackle areas that have been stifling the economy.

A survey from the British Institute of Innkeeping​ (BII) earlier this month also found despite positive trading over the summer, high costs had hampered profitability with just one in four making a clear profit.

Elsewhere, some 33% of operators have reduced trading hours as a result of cost hikes and a drop in footfall, according to CGA by NIQ’s latest Business Confidence Survey​.

Though operators were not confident the Government will announce a VAT reduction for the sector in the upcoming Budget.

“I will eat my hat if this Government give us anything at all. I have no confidence in them helping us at any time.”

Owner of Top 50 Gastropub the Unruly Pig in Bromeswell, Suffolk, Brendan Padfield said: “The Government is broke, they even cannot pay for the recent round of public sector pay increases, so the chances of a VAT cut are minimal to say the very least.

“Just look at flack the Government is receiving for cutting the winter fuel supplement. There are few votes in cutting Government income by giving hospitality a VAT concession.

“The Government are already scaping the barrel to make ends meet. Pigs might fly but however deserved, a VAT cut for hospitality is, for me, most improbable.”

Likewise, owner of Cheshire Cat Pubs & Bars Tim Bird was also sceptical about the likelihood of a much-needed VAT reduction.

He said: “I will eat my hat if this Government give us anything at all. I have no confidence in them helping us at any time.”

Though the operator detailed a VAT reduction between 5% and 8% on food and non-alcoholic drinks would be a “victory of huge magnitude”.

“This has been on the hospitality agenda for years if not decades. It would help balance all the rising costs and potential return to full business rate payments next April 2025”, he stated.

Bird added this would in turn allow for “greater opportunity” for investment across the board within the sector as well as avoid having to put prices up to help maintain food margins.

Though the operator warned the “whole hospitality sector” needed a VAT reduction, not just pubs, in particular for smaller businesses.

However, he urged action to tackle business rates would be more beneficial for some as a VAT reduction on food and non-alcoholic drinks would not help wet-led venues.

More pressing 

UKHospitality (UKH) also recently urged the​ Government to provide a solution to avoiding sky-rocketing business rates bills in the upcoming Budget.

A pub with a rateable value of £80,000 could see its rates soar by almost £33,000 if the current rates relief ends on 31 March next year, according to UKH​.

The trade body called for a permanent, lower and universal hospitality multiplier, which would start to deliver the Government’s manifesto pledge​​ to rebalance the system and is backed by the Hospitality Sector Council.

Furthermore, the British Beer & Pub Association this month called for the Government to unshackle the sector and tackle soaring costs after the industry added billions to the economy​ in just one year.

Owner of the Tamworth Tap in Staffordshire, George Greenaway told The MA​ any level of VAT cut would be “beneficial”, but that business rates subsidy was “more pressing”.

He said: “A VAT cut could offset the increases in energy costs that have eaten into any remaining profits.

“It would allow us to invest in more staff to cover the seasonal increases but more importantly save some pubs from closing.

“Any [level of] reduction would be beneficial, the quarter end comes round very quickly, but I’m not sure the Government are in a position to reduce having cut the winter fuel allowance.

“More pressing is the retention of the business rate subsidy. The removal of this would be catastrophic. If it is announced it would give us some hope the Government want to work with the industry and recognise its importance to the economy.”