Covid-19 has forced many difficult decisions to be made. When the UK government urged people to avoid social contact and stay at home, it was to slow the spread of the disease. However, it also had another effect. One of the consequences of flattening the curve is a chilling effect on the economy. For the hospitality sector, the effects are particularly devastating; that is why there is the VAT cut. With customers gone, businesses are forced to close their doors or have much leaner operations.
The latest announcement from UK Spring Budget 2021 – Vat Cut for Hospitality Industry – VAT Rates
More on the hospitality sector, the VAT discount for hospitality and leisure businesses will remain at 5% until September 30th and will increase to 12.5% for another 6 months before it goes back to the standard rate of 20%.
To offset the sluggishness in the hospitality industry, the government announced initiatives to help stimulate the economy, which also involves the VAT cut. One of these is a discount program that will allow participating businesses to offer a 50% discount for those who dine out at restaurants.
Another great announcement which is part of the summer statement is that the Value Added Tax (VAT) will be cut to 5% for this particular sector. Under this, the hospitality industries – specified to be food and non-alcoholic drinks, accommodations, and attraction – will be lowered from the usual rate of 20% to 5% from July 15, 2020, to January 12, 2021.
According to Chancellor of the Exchequer Rishi Sunak, the ultimate goal of these plans is job protection. The hospitality industry in the UK consistently ranks as one of the sources of employment. Ensuring its survival is imperative to prevent massive layoffs.
The basic principle behind the initiatives announced by Sunak is that businesses who are confident that demand will be there will retain people for employment. It is expected that these initiatives will inject the industry with up to £4 billion and save 2.4 million jobs so by having the VAT cut also really helps.
VAT and Consumer Behavior
VAT is a type of consumption tax. It is levied on a product whenever an additional value is added to it at the supply chain, from its manufacturing until the point of sale. The tax is collected at each stage and is eventually paid by the final consumer. In short, it is the consumer that pays for the taxes, but the businesses collect these taxes.
In the UK, there is a standard VAT rate of 20% on most goods and services. Cutting it down to 5% can mean significant savings to consumers. For example, if the cost of a meal without VAT is £50, the final amount, which includes the VAT is at £60 at a 20% rate. With the new VAT rate, the final price is £52.50 for the same meal.
Obviously, prices will go down with the tax cut. How does this affect the hospitality sector? Lower prices tend to increase demand. Customers are enticed to eat out, stay in hotels or campsites, and engage in leisure activities like watching movies or going to the zoo.
This situation means that employment becomes more stabilized. After all, a restaurant with customer needs chefs, servers, and cashiers. A hotel with guests needs receptionists, cleaners, and management officials. Employment is a critical factor in the economy. The wages that workers receive turn into spending, which is necessary for economic growth.
A drop from 20% to 5% is massive. It is a drastic measure meant to jumpstart in the economy. Although there are many uncertainties in the post-pandemic reality, the UK government is banking on the notion that no one can resist a good deal.