Last week I was at an evening function catered by a brilliant local independent café and restaurant. Exactly the kind of place we all love to see on the high street, and quietly mourn when it’s gone. The food was wonderful. One of the speakers said so, to warm applause, and then gave a plug for the current campaign to cut VAT on hospitality businesses from 20% to 10%.
It sounded completely reasonable. How could it not, breaking bread served by the very people the policy is supposed to save?
Then I went home and read the numbers.
The campaign
The campaign is called VAT’s The Problem. It’s fronted by chef Tom Kerridge, backed by UKHospitality, and has gathered over 200,000 signatures asking for a permanent 10% VAT rate for pubs, restaurants, cafés, hotels, bars, nightclubs and festivals. Save the locals. Save the high street. Who could object?
Well. Here’s the first problem.
Around 45% of hospitality businesses wouldn’t benefit at all. They’re not registered for VAT, mostly because they’re below the £90,000 turnover threshold. They are, almost by definition, the smallest and most fragile businesses in the sector: the village tearoom, the two-person sandwich shop, quite possibly the very café that fed us so well that evening. They’d see the wage bills and the business rates that prompted the campaign, and precisely none of the relief.
So where would the money go?
Follow the money
A VAT cut is allocated by sales, not by need. The bigger your sales, the bigger your cheque. Tax Policy Associates has run the numbers, and the largest single beneficiary would be McDonald’s, at somewhere north of £400m a year.
Yes, that McDonald’s.
Wetherspoon makes the point even more neatly. Its recent cost shock from higher wages, employer National Insurance and business rates comes to roughly £63m a year. Its benefit from the VAT cut would be roughly £193m. Three times the size of its problem, every year, indefinitely.
And the total bill? At least £12bn a year. The industry’s own estimate of the cost shock it’s trying to offset is about £3.5bn. The campaign is asking for a remedy more than three times larger than the ailment, with the biggest doses going to the patients in the best health.
But surely prices would fall?
They wouldn’t, and we don’t have to guess.
France ran this exact experiment in 2009, cutting VAT on restaurant meals from 19.6% to 5.5%. Thirty months later, menu prices had fallen by less than 2%. Restaurant owners kept over half the money and their profits rose by about a quarter. When the rate later went back up, prices rose four to five times faster than they had fallen. Lithuania tried something similar during the pandemic; the IMF found no measurable effect on consumer spending at all.
And in this case, the campaign isn’t even pretending. Kerridge himself told an industry event that businesses should absorb the cut to stabilise themselves, with savings perhaps passed on in two or three years. When the economists say prices won’t fall, and the campaign says prices won’t fall, you can be reasonably confident that prices won’t fall.
The Jaffa Cake problem
There’s a deeper issue, and it’s one regular readers of this series will recognise: what happens when you draw an arbitrary line through the tax system and attach money to it.
VAT already has Britain’s most entertaining case law. A Jaffa Cake is legally a cake, not a biscuit, which matters a great deal to HMRC.¹ A pasty left to cool naturally on the counter is zero-rated; the same pasty kept under a heat lamp attracts 20%. HMRC recently spent years in litigation over whether a large marshmallow is confectionery. £472,928 was riding on the answer.
Now imagine creating a brand new 10% category between zero-rated food and 20% everything else, worth billions, and inviting every business in the country to find its way in. Supermarkets add seating and become cafés. Sports events rebrand as festivals. Serviced apartments discover they were hotels all along. None of this is dishonest; it’s simply what rational businesses do when the tax system makes one side of a line far more valuable than the other. Tax Policy Associates estimates this boundary creep alone could push the annual cost from £10.8bn towards £14bn.
The point of the series
This series has argued that tax reform should raise the money we need sensibly. VAT, for all its quirks, is one of the better tools we have: broad, hard to avoid, and less damaging to growth than most alternatives. The way to ruin it is to carve holes in it, and ours is already one of the holiest bases in the developed world. Only around half of UK household spending attracts the standard rate. Economists from the free-market right to the progressive left, who agree on almost nothing else, agree that a broad base with a single rate beats a patchwork of special pleading.
None of which means hospitality isn’t genuinely hurting. It is. But its costs are employment costs and property costs, and the sensible fixes are employment and property fixes: reforming business rates, and revisiting the employer National Insurance rise. Not a £12bn sales subsidy that misses half the industry and writes its biggest cheques to the businesses least in need of rescue.
For the full analysis, including the methodology behind every figure above, Dan Neidle’s report for Tax Policy Associates is the definitive deep dive: [The £12bn VAT cut for hospitality. Who really benefits?](https://taxpolicy.
The brilliant local café deserves better than a campaign that wouldn’t help it. So, frankly, does the tax system.
Altor advises clients from our office in Hook, across Hampshire, Surrey, Berkshire, Sussex and Kent, and throughout the UK using the latest technology.
¹ The 1991 tribunal hinged, in part, on the observation that cakes go hard when stale and biscuits go soft. The Jaffa Cake goes hard. Cake, therefore, and zero-rated. Your taxes at work.