Hotel operators are facing a pricing dilemma

Following the Chancellor’s Summer Statement, hospitality businesses are facing a new challenge. The Chancellor included a few welcome reliefs for businesses in this sector, but the reporting of the temporary reduction in the VAT from 20% to 5% has been less than clear.

A saving of “£160 per household” has been headlined on the back of this reduction, but the Treasury has subsequently said that whilst it hopes businesses will pass on VAT savings to customers, recognises they have been without income for months so it would be their decision.

Why the mixed messages? Accommodation providers have advertised room rates along with menu pricing for food. A reduction in the VAT rate doesn’t mean businesses will reduce their price, nor should they feel they have to. When we’ve seen changes to VAT rates in the past this doesn’t always lead to changes in price to customers. The right price for goods and services is ultimately what someone is willing to pay for them according to the availability of supply versus the demand for those good and services.

The availability of “supply” to customers is being hampered by a number of factors; businesses struggling to open safely, longer changeover periods for accommodation and reduced capacity in restaurants and bars. We’re also approaching the busiest time of year for many businesses in the sector, with many reaching their maximum occupancy and cover levels over the summer.

In terms of “demand” there’s a pent up desire for breaks away and hospitality services arising from the lockdown period. Combine this with a reluctance of many to go abroad and the recently announced ‘Eat out to Help Out’ scheme, and we should see a strong demand for hospitality services.

In my view, hotel operators should keep their prices at the normal rates in the short term. The reduction in VAT rate should be used to benefit the businesses which have been hit hard in this sector and recoup some of the losses over the past few months. Given time we may see businesses reduce their prices to attract customers and the VAT rate cut provides a greater latitude for doing this. However, most hotels already flex their rates with deals and offers during the quieter winter period and that’s when businesses can take advantage of the VAT rate reduction.

Many European countries have a lower VAT rate for hospitality services and I would hope we may see this reduced VAT rate maintained for an extended period, however, assuming the reduction in VAT comes to an end as planned in January 2021, accommodation providers may change their pricing behaviour and provide discounts on bookings paid in advance. Any amounts received prior to the uplift in the VAT rate will only be liable to 5% VAT, therefore, businesses may seek to incentivise early payment by sharing some of the VAT saving.

Having talked to a variety of businesses in this sector, some customers are seeking reductions in price following the VAT rate cut. My response to those customers is simple; businesses in the hospitality sector have had to endure months with little or no income. The VAT rate cut should be used to help these businesses survive and replace what has been lost over recent months. The “Eat out to help out” scheme provides discounts to consumers and they should make use of that.

Contributed from Armstrong Watson Accountants, Business and Financial.

Written by Richard Andrew, who has been providing practical, commercial advice to owner-managed businesses in the hospitality sector for over 15 years. He also heads up Armstrong Watson’s Accountancy service line and is a director of the Lakes Hospitality Association, offering support and advice to hospitality and tourism businesses across the North of England.