By Kunal Sawhney, CEO of Kalkine (www.kalkine.co.uk)
Taking a bold step, the Irish government has decided to extend a reduced 9 per cent VAT rate for the hospitality sector by six months. The extension of the special measure that was introduced to support hospitality businesses hit by the Covid-19 may cost the government around €200 million to €250 million. The amount may sound hefty to many, but it was the need of the hour as the measures were due to expire at the end of August when the hospitality industry is still struggling to stand on its feet.
The decision will not be a budget day announcement and would likely be implemented through an amendment to the Finance (Covid-19 and Miscellaneous Provisions) Bill currently making its way through the Oireachtas, a committee that scrutinises any legislative proposals. Something of this sort was coming became evident when at a hospitality conference last month, Minister for Tourism Catherine Martin stated that she was pressing for the extension of reduced rates. The government has also clarified that the reduced rate for hospitality will revert to its normal level of 13.5 per cent at the start of March 2023, though optimism is high that it could get extended until the end of 2023, which may cost the exchequer around €500 million.
The VAT rate in the UK
In the UK, the government had announced a 5 per cent reduced rate of VAT in July 2020 to 15 per cent for certain supplies relating to hospitality, hotel, and holiday accommodation, which was replaced with a 12.5 per cent reduced rate effective until 31 March 2022. Before the reduction in VAT rates for hospitality, the normal rate was 20 per cent, which has now been reverted from 1 April 2022.
UK households are already struggling with the cost of living crisis, and despite this, the hospitality businesses are forced to pass on the rate hike to the customer. Hospitality businesses need to make a profit to grow and evolve, and despite providing their patrons with an affordable and valued experience and if they are compelled to increase prices, it can impact the business prospects, testing guests’ loyalty.
Industry has been saying that the government’s decision to revert to the standard rate of VAT lacked the recognition of the sufferings of the industry.
Impact of the cost of living crisis starts showing in hospitality
The latest data from Barclaycard has revealed that while the average spending on utilities per customer increased near to 29 per cent in April, consumer spending on nights out and takeaways witnessed a sharp decline. Bars, pubs, clubs, and subscriptions all witnessed slower growth in April.
However, at the same time, consumer spending on travel and international holiday bookings reported a decent improvement.
Scramble for weekend breaks at Easter was visible in the increased spending on hotels, resorts, and accommodation.
Final thoughts
UK hospitality suffered a lot during the pandemic, though it also provided an opportunity for them to re-invent and adapt to an unprecedented crisis. Businesses evolved to seize future opportunities, and government support was duly needed for that. It can’t be denied that sensing the grave repercussions of the pandemic on the hospitality industry, the government has been regularly announcing measures to support them, but the reversal of the VAT to its standard rate can be called hasty, and a decision to extend the reduced rate duration for another sometime would have supported the households to some extent amid rampant inflation.
