“Businesses are going to be incredibly challenged to sustain themselves, having just begun some recovery after Covid,” reveals Lionel Benjamin, co-founder of AGO Hotels. The hospitality industry was already “decimated” by the Covid-19 pandemic and now, following Sunak’s announcement, the sector is being further burdened with VAT rates going back up from 12.5% to 20%. As an industry, hospitality is being faced with inflation within the profit and loss that has “never been experienced at this level”, including both labour inflation and utility inflation. Furthermore, Benjamin explains that costs from third party suppliers which hospitality businesses rely on will also be growing as a result of rising energy and labour costs that “are going to be hitting everyone”.
“We were very disappointed not to have heard of an extension of the lower VAT rate, which was our top ask of the government,” adds Tony Sophoclides, strategic affairs director of UKHospitality (UKH). Ultimately, this means that many parts of hospitality are at a “disadvantage” in the summer season with rising business rates for most, as well as rising energy prices and supply chain prices “going through the roof”. Sophoclides imparts: “And yet, we’re returning to very uncompetitive VAT rates, especially in those parts of hospitality that benefit from tourism.”
He reveals that the 12.5% VAT rate which will remain in effect until the end of March is in itself higher than most VAT rates applied in countries where the UK competes on tourism, so having that rate go back up to 20% is a “real blow”. According to UKH, this could add a further 1.7% onto the consumer price index (CPI). In a recent statement by the Office for National Statistics (ONS), inflation in the UK has hit a 30-year high at 6.2% in February 2022, which is the highest CPI 12-month inflation rate in the national statistic series which began in January 1997, and the highest rate in the historic modelled series since March 1992 when it stood at 7.1%.
Additionally, the World Economic Forum revealed that prior to Covid, the UK ranked 137th out of 138 countries in tourism competitiveness, which Sophoclides states is largely because the UK’s VAT rate on hospitality and tourism services is at “such a high level”. “The government said this was because it was constrained by EU regulations prior to Brexit, but now we’re free of that. There’s no reason why we ought to be operating on a global basis while being shackled by our own tax system,” he emphasises. Looking across competitive tourism destinations, he highlights that countries such as France, Italy and Ireland all have VAT rates on hospitality from between 7% to 11%. “If we want to grasp an opportunity to boost our competitiveness on a global level, a retention of the 12.5% VAT rate is the way to do it,” he stresses.
Additionally, on a monthly basis, the consumer price index (CPI) rose by 0.8% in February 2022, compared with a rise of 0.1% in February 2021, representing the largest monthly CPI increase between January and February since 2009. What are the long term implications going to be of this? Benjamin states: “Some businesses are likely going to fold because cash flows have been depleted and the reserves that one keeps for a rainy day have been used. Covid was our rainy day and after weathering that storm, it’s now coming to this.” He highlights that for those businesses that are actually able to withstand these additional costs, it is likely these businesses will have to pass the price increases onto consumers.
Similarly, Sophoclides adds that there is only so much businesses can absorb without passing on at least some costs to consumers. However, with consumers’ pockets being “heavily hit” amid rising inflation levels, the likelihood of disposable income will be “significantly reduced”. By bringing VAT rates back up to 20%, combined with the “high” levels of debt that many companies are trying to overcome following the pandemic, Sophoclides notes this “creates a package of cost hikes that means that many businesses won’t survive or won’t be able to employ the people they need to employ in order to revive their businesses”.
Meanwhile, if no further actions or support are provided by the government later this year, “businesses will fail”. “A potentially better, but still pretty grim, outcome would be that people simply won’t be able to invest in their businesses in a way that would produce optimum outcomes for all and they won’t be able to create more jobs as they struggle with debt,” Sophoclides notes. By the same token, Benjamin expresses that more businesses will close and people will consequently be made redundant. “Businesses that close means the government loses money on business rates, so the economy will lose on taxes. Those that are left open will pay the brunt; it’s not a positive outlook at the moment,” he remarks.
What should the Spring Statement have included? According to Benjamin, a reduction in green taxes this year, or holding back the green levy to help with costs, would have been welcomed in order to aid the hospitality industry in not only “saving the planet” but to “give a break” to those who can “ill-afford” any additional expense at this moment in time. “He could have put the additional discounts he gave to operational businesses back to the utility companies, who at the moment are going to be making an absolute windfall on the back of all of this, so that he’s not out of pocket, and the economy’s not out of pocket,” he asserts. The industry is going to have to contribute to the green levy for many years to come and so a temporary break as hospitality gets back on its feet would have provided a “stabilising opportunity” for the sector.
Meanwhile, to help the rising cost of living, the chancellor confirmed an increase to the national insurance threshold by £3,000. That means employees will be able to earn £12,570 without paying any national insurance tax, with 70% of workers set to benefit from the tax cut. However, hospitality workers are going to be heavily hit amid the rising inflation levels; according to AGO, team members are already coming to management expressing troubles with increasing utility bills at home. “We need to be cognizant of that so we have to be able to give them sufficient income, which is why I think there’ll be inflation on labour costs,” Benjamin maintains.
Ultimately, this means that hospitality businesses will have to pay more money to employees in order to tackle general living costs and to retain team members, including by helping them with salary which is a further added cost to businesses. He says: “We need to look after the people we’ve got. We won’t hold on to them otherwise, they’ll go elsewhere.” This is something which the sector has already been suffering with throughout the pandemic when employees were “tempted away” to other industries, thus creating a labour shortage. Benjamin adds: “Without them, we have nothing. We can’t service hotels without team members, we can’t service guests and we can’t service the business.”
On the other hand, there was still some “good news” that came from Sunak’s announcement, according to Sophoclides. Sunak announced he will review the apprenticeship levy to ensure it is doing enough to incentivise businesses to invest in training, which is something that Sophoclides commends as it will provide opportunities for employer investment in training to strengthen the UK’s workforce. In addition, the “generous” increase in the national insurance threshold for employees will “boost” disposable income, which Sophoclides hopes will be spent in hospitality venues. He shares: “However, we would have liked to have seen the threshold for employers also increase so that it will help more people into hospitality jobs.”
Nevertheless, how can hospitality businesses get back on their feet? Benjamin discloses that the industry requires the support of VisitBritain to encourage staycation within the UK. Additionally, with borders reopening, the UK government needs to review travel visas and work visas. “We need the government to relax some of the laws on entry into the country for tourism purposes. Let there be more flexibility around tourism and even employment visas to help fill some of the void,” he adds.
Meanwhile, Sophoclides hopes the hospitality sector will see consumer confidence returning “more swiftly”, leading to “better levels of tourism revival”. He hopes that as a result of the extra disposable income resulting from the increase to the national insurance threshold, that a “decent proportion” of that is spent on the hospitality sector. He states: “It looks as though a larger proportion of people will be holidaying in the UK again, compared to pre-Covid levels, which would be good news for the sector. But we hope that that’s augmented by increased inbound tourism as well.”
On the catering side of the industry, Sophoclides reveals that problems in the supply chain must be eased to help businesses. “We must overcome problems in the supply chain, whether that’s at board level or other measures that the government might implement,” he asserts. For example, there is still a shortage of drivers across the country, so Sophoclides highlights that incentives can be used in order to ease these problems.
What further support would hospitality leaders like to see from the government? If the government has “closed the door” on an extension of VAT, then Sophoclides concludes the “immediate focus” must be on introducing urgent additional measures to help businesses cope with the energy crisis, including caps on commercial energy rates. As such, Benjamin suggests that the UK government should provide the industry with grants towards ESG to avoid using the current supplies and move to renewables. “The government could have looked at giving us tax breaks, incentives or grants that allow us to replace current energy with renewable energy. This would have been a great support,” he highlights. Ultimately, these grants will aid businesses to keep costs down, it helps with ESG, and it helps get the industry “get to a point where we can absorb more within our businesses for a short term until we get back onto an even keel”.