Independent accountancy firm Wbg has warned that a proposed cut to the hospitality VAT rate may not be the “silver bullet” many businesses hope for, despite growing industry support for the measure.
The Scottish Licensed Trade Association has backed calls for a 10% hospitality VAT rate through the VAT’s The Problem campaign, fronted by chef Tom Kerridge and supported by trade bodies including UKHospitality.
However, Wbg said detailed analysis by Dan Neidle of Tax Policy Associates (TPA) raises questions over whether a targeted VAT reduction would provide meaningful help to the hospitality firms facing the greatest financial pressures.
Keith Miller, Wbg’s head of VAT, said: “TPA argues that contrary to often cited anecdotal evidence, recent experiences in European countries suggest that ‘targeted’ VAT-rate cuts do not deliver the results that might be expected, with VAT savings instead delivering enhanced profits to larger chains rather than those businesses most in need, and little evidence of VAT savings being passed onto consumers.”
According to the analysis, a reduction in the VAT rate to 10% could leave around 45% of hospitality businesses with no benefit at all, while larger operators could receive the greatest savings.
Miller added: “The analysis appears to support this argument, suggesting that if a 10% VAT rate is introduced, 45% of hospitality businesses will see no benefit at all, with big business being the main beneficiaries – McDonald’s VAT savings are estimated to be £400m and Wetherspoons £193m.”
TPA’s report also suggests the potential VAT saving across the sector would be three times greater than the value of the recent “cost shock” associated with rises in employer National Insurance contributions, the minimum wage and business rates.
While hospitality businesses have argued that a lower VAT rate could protect jobs, encourage consumer spending and support investment, the analysis questions its effectiveness as a wider growth measure.
“In terms of being a catalyst for growth, TPA concludes that the ‘bang for the buck’ for this proposal – the long-run GDP benefit per pound of tax-cut cost – is one of the lowest of any potential tax cut it has analysed,” said Miller.
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“Their analysis further supports their opinion that there are much better ways to support business than to tinker with VAT rates.
“Food for thought.”
