Hospitality: The VAT nightmare

The UK Government has recently announced its intentions to restore hospitality VAT to its pre-pandemic level in the coming months – as a result, the sector will see it rise from 12.5% to 20%. UK Hospitality says it has “major concerns” that once the figure returns to its standard that businesses will have no choice but to significantly raise their prices, “putting pressure” on the cost of hospitality experiences. It has even declared the rumoured price rises for consumers now “inevitable.” The institution correspondingly predicts “many” hospitality venues to fail, proposing the planned increase in VAT, employment costs and business rates proving “one financial burden too many”, or as Lionel Benjamin, co-founder of AGO Hotels describes, “the straw that broke the camel’s back.”

Benjamin has served 30 years in the hospitality industry, working as operations director for hotels throughout London, including the renowned Savoy Hotel. His career later developed into the sale of hotels and asset management, identifying opportunities and locating weaknesses. In 2020 Benjamin took his career a step further by entering into a partnership with co-founder Viv Watts to establish AGO Hotels, a new “landlord friendly” hybrid lease model that positions the hotel as the tenant, signing long-term leases with hotel landlords allowing AGO to take full operations of the hotels.

“We started off with nothing in 2020. In a 10 month period we went from zero bedrooms to 1000 bedrooms and we want to increase this figure to 2000 rooms this year.” 

The operations specialist underlines the hotel group is “aggressively” seeking new opportunities to expand in the sector – but with the predicted VAT increase on the horizon, ‘new opportunities’ may be scarcely located: “Our recovery is only really just beginning,” says Benjamin. “Governments are clearly of the opinion that the pandemic is coming to an end,” yet he discloses it is “not even close” to being over.

UK Hospitality shares Benjamin’s concerns, warning firms that they will “undoubtedly” have to burden consumers with price rises as a result. The association expects nearly 50% of operators will be “forced” to increase consumer prices by over 10% this year. It stresses, at a time when the UK is currently experiencing an increase in the general cost of living, the government “must” keep VAT as low as possible to secure consumer spending in the sector – but what will happen if it does not? Let us assume the Government forges ahead with the planned VAT hike, how then will hospitality firms maintain a healthy level of business?

“You need to appeal to a different type of consumer,” Benjamin underlines. “A new ‘Work From Hotel’ consumer” and hotel group Accor is of a similar opinion. The group integrated ‘modular workspaces’ throughout its hotels, suggesting ‘work from home/remote working’ experiences have “multiplied” across Europe and in the UK since reopening – in fact, some of these hotels are converting their rooms into offices on a “daily basis” for people who no longer want to work from home. Benjamin alludes to, ‘kids’, ‘dogs’ and ‘general at home distractions’ as key motivators for people wanting to operate elsewhere for the need to be more productive: “Working from hotel is an opportunity for someone who may not have the ability to work from home because they have competition for quiet space in the flat.” He proposes ‘working from hotel’ allows for some form of “normality” to be gained – and it’s clearly proving a success – since early August 2020, Accor reports the scheme has been adopted across 320 hotels in Northern Europe alone. Accountancy firm Grant Thornton gives insight into why the model can be so successful, maintaining that hybrid working “boosts productivity and wellbeing”, displaying that over 90% of people prefer this model of work. 

“We’ve got to broaden our approach of alternative use of space to attract a different type of client,” Benjamin concludes. “Because I don’t think we can keep pushing costs onto the consumer in such a competitive environment.” 

It may not be so simple for hoteliers to completely redevelop their interior, however. Benjamin notes that a series of small changes can also have a similar effect.

Hoteliers can create business clubs in lounges where workers can “rent a table for the day” rather than have an entire office space, suggests Benjamin. “Workers will have the ability to order a cup of coffee, and make use of high speed internet – I think people will be happier to work in those types of environments.” The co-founder also underlines it is about utilising time. For instance, hotels naturally operate in the evenings and overnight, that is just the nature of the industry, yet during the daytime they have a surplus amount of real estate “sitting empty” – it is about finding new opportunities to maximise potential revenue. 

Publication Hotelier cites that by embracing these “progressive ideals” hotels can diversify its property whilst correspondingly benefit from an additional revenue stream. It alludes to the potential of hoteliers refining their ‘design’, ‘furnishings’ and updating their ‘technology’ to cater to this new avenue.

Benjamin suggests hotels need to “assess” its current furnishings, with particular emphasis on the “layout of public areas space and how they’re being used” to really ensure that they are maximising their profit. “We’ve got to think of profit per square ft within our businesses and how do we ensure the guest feels comfortable without cramming everybody in? We’ve got to create something that’s a bit different.”

Yet firms will correspondingly need to ensure they are not compromising on customer service. “People want good service,” states Benjamin. “It’s got to be seamless for guests coming into hotels today.” A recent study by Hotel Business deduced that almost 60% of consumers seek for a “better than at home” wifi connection, with 81% naming ‘experience’ as the most important attribute to a hotel. From local knowledge of the area, to room-service and an elaborate amount of amenities, hoteliers should also update their offerings, where able, to appear innovative in the market. “We’ve got to maintain the high speed internet, we’ve got to really be able to produce a good cup of coffee because there is going to be so much competition to the consumer that does want to stay in a hotel.”

Whilst VAT costs may be on the rise for hospitality, one way hoteliers could reduce their outgoings is by employing a fair ratings specialist to ensure firms are not “excessively” assessed and overcharged for their business rates. Throughout 2022, the Valuation Office Agency is supposedly reviewing the rateable value of every hospitality venue in England and Wales and setting new rates for 2023 onwards. As assessments are based on turnover, and trade has been inconsistent due to the pandemic, the likelihood of ‘erroneous’ valuations being set on the new rating list is almost certain. “We benefited from furlough, we’ve benefited from relief on business rates, we had various state schemes” and now it is time for the sector to do all it can to “keep its revenue,” says Benjamin. Star Pubs and Bars ‘The Bull’, in Warlingham was one of the first pubs to trial the service with rating specialist Dunlop Heywood. It has resulted in a rebate of £13,800 and cut the pub’s rateable value by more than 25%, leading to reduced bills ongoing. “Money that is not tied up in rates can be invested back into a business to make it more sustainable,” says Chris Moore, Star Pubs and Bars property director. Rebates and ongoing savings on rates bills can “fund improvements,” such as adding a new “covered outdoor space or refitting a kitchen,” the director alludes to – it will “immediately” generate more trade for the business.

It can be said that hospitality is enduring a “perfect storm” at present. Not only is the sector now having to contend with the looming cloud that is the planned VAT increase, the surge of competitiveness in the sector is also leaving firms out of pocket. The sector is presently being encouraged to take a positive stance on improving its green credentials, however “there’s been no real support implemented for changes that are going to be required,” consequently burdening the industry with yet another cost. In an attempt to mitigate these risks, hoteliers must now look to refine their assets. “It is about focusing on new opportunities,” Benjamin reminds, and attracting the new working from hotel consumers will open a new revenue stream for the sector. In addition, updating furnishings and ensuring hotels are geared with the latest technology may also ease the financial burden, similarly a new rental approach could prove beneficial to hotels that have the opportunity available. 

Yet Benjamin stresses the burden to mitigate all risks should not ultimately be placed on hoteliers and urges the need for Government intervention: “If we don’t see some more aid coming in, and some other initiatives from the government, it will be disastrous.” He presses the chancellor to take imminent action to support the industry and expresses the need for further initiatives as seen in 2020. He says: “If this industry takes even a small hit, it further strains the economy. If there is the support for the industry, we can service the needs of UK travellers and foreign travellers coming back into the country.” “Since tourism brings so much revenue into the economy, it has got to be a ‘worthwhile’ industry for the chancellor to invest in,” concludes Benjamin.