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The increase in VAT for hospitality from 12.5% to 20% which is effective today, combined with a forecasted cost inflation running at 18%, means that double-digit price increases will come into effect for consumers as operators “struggle to survive”, UKHospitality (UKH) says.
The industry body said that the industry is facing a 95% hike in energy bills, 19% in labour costs, and a 17% and 14% rise in food and drink prices respectively, and that these pressures are likely to have worsened in the last two weeks.
According to the body, keeping VAT at 12.5% would have supported operators trying to absorb this tidal wave of cost increases, which come as consumers face their own cost of living crisis.
UKH added that raising prices at this time will “wreak havoc on consumer demand, further damage an already fragile sector and have a detrimental impact on the wider UK recovery”, as the sector will be “unable to play its full role” in generating jobs, investment and tourism.
Prior to Covid-19, hospitality created £130bn in economic activity, generated £39bn of tax for the Exchequer and represented 10% of UK employment.
The UK reportedly has one of the highest rates of tax for food and accommodation in Europe as the VAT rate for France and Spain is set at just 10%.
Kate Nicholls, UKHospitality CEO, said: “The now inevitable price rises for consumers will dampen demand and many hospitality businesses – one in three having less than a month of cash reserves and most are carrying heavy debt burdens – will fail as a result. This can only cause the UK’s wider economic recovery to falter.
“We will continue to work closely with the government to achieve the best possible trading conditions for the industry, keep pushing for reform of fundamentally unfair and crippling business rates, play our role in solving our workforce crisis and persist in making a case for the clear benefits a permanently lower rate of VAT will have.”
Paul Campbell, sector investor at Hill Capital Partners LLP, added: “It’s disappointing that the government has withdrawn virtually all support from a sector that can demonstrably help drive the recovery, growth and create jobs – it had the opportunity to be far more progressive.
“Hospitality businesses are fighting an unprecedented wave of cost increases and doing all they can to keep prices down for their customers. But the removal of VAT relief makes this impossible and will lead to more inflation and menu pricing will inevitably rise.”
