Tax Increases Must be Measured to Avoid More Shocks for Hospitality Businesses

Any tax increases the Government might be planning in order to recoup some of the money spent dealing with the pandemic must be carefully measured. This would help to avoid further shocks for hospitality and leisure businesses as they continue to grapple with challenging trading conditions.

Some reports have suggested that Chancellor Rishi Sunak might be planning to increase the rate of Capital Gains Tax (CGT), possibly as high as 45%. According to hospitality and leisure specialists at Menzies LLP, this could stifle entrepreneurial business plans and make it harder for SMEs in the sector to invest in job creation and productivity improvements.

Chris Maloney, partner at accountancy firm, Menzies LLP, said:

“While some tax increases are expected, any decision to increase CGT above 38%, the current rate of tax that applies to share dividends, could have a devastating effect on the hospitality and leisure sector. Entrepreneurs would no longer have any tax incentive to invest in building up the value of a business in order to realise gains at the point of sale. The flow of investment into entrepreneurial businesses could start to dry up as a result, undermining the sector’s fragile economic recovery.”

To avoid further business shocks, Maloney recommends a measured approach. He said:

“The last 18 months have been particularly difficult for the hospitality and leisure sector, which is now a third of the size it was before the pandemic. The industry is currently facing a major staffing crisis, with job vacancies at their highest ever level. The Chancellor should consider introducing schemes and initiatives designed to mitigate this issue and address skills gaps by encouraging recruitment.

“Both the Covid-19 pandemic and Brexit have contributed to rising costs and materials shortages too. Further shocks for businesses must be avoided and any tax increases should be phased to minimise collateral damage for the economy.”

With the 1.25% increase in Employer NICs due to take effect in April 2022 and Corporation Tax set to rise from the current rate of 19%, to 25% in April 2023, it is clear that the tax landscape for businesses in the sector is getting much tougher.

Chris Maloney adds: “For SMEs in particular, as headline rates of Corporation Tax and Employer NICs start to increase, it becomes even more important to manage inflationary pressures on the cost base carefully, to remain viable.”

“Currently, the VAT rate has been reduced to 12.5% for the sector but this is due to rise to 20% in April 2022. We would really like to see this lower rate maintained for the foreseeable future, if not permanently. This would help to get more customers through the doors, helping businesses to continue trading and protecting jobs for staff.”