Axe VAT for the hospitality industry

How can reducing VAT help the economy?

With high unemployment levels and increasing difficulty in finding jobs, the job market in the UK along with the economy needs boosting. One method suggested by the VAT club founded by Jacques Borel is that a reduction in VAT would increase sales and employment, bringing long term benefits to the economy. VAT (Value Added Tax) is the tax on the purchase price of goods. This is an indirect tax, which is enforced on all people regardless of their wealth; a poor person would be taxed the same amount on a product as a rich person would be. According to Jacques Borel, one sector which would benefit widely from reduced VAT is the hospitality sector. This particular sector mounts an incredibly strong argument for the reduction of VAT. The total number of jobs in the hospitality sector in the UK is approximately 2 million and the industry is particularly important in providing financial stability to young, unskilled, and disadvantaged workers. The Association of Licensed Multiple Retailers job tracker research showed that licensed hospitality created 1 in 6 jobs for 18-24 year olds. The expansion of this sector is relatively easy, with pubs, bars, and cafes with low barriers of entry. Lower VAT rates would be able to stimulate the creation of new businesses and jobs in the sector. On top of that, the VAT reduction would lead to lower prices in food, possibly higher salaries for employees and better training, therefore increasing the quality of service. Another argument for the reduction of VAT for the hospitality sector is to keep it fair and in line with supermarkets. Currently pubs and restaurants pay 20% VAT on food and drinks, whilst supermarkets pay 0% VAT. This has led to many people, especially students deciding to eat in rather than out, meaning fewer people supporting the on-trade and the jobs created there. They claim that it is not fair that supermarkets pay a fraction of the tax pubs pay per pint. However, a reduction in tax would lead to a direct decline in income for the treasury via VAT receipts. Jacques Borel suggests however that this difference would be made up for by higher income tax, National Insurance payments, higher corporation tax receipts, saving in unemployment benefits and through the fact that more businesses will end up paying tax. This is because there will be less incentive for small businesses to stay below the tax threshold of £77,000 per annum, there would be less under-reporting of cash receipts (‘Tax Gap’) and as such higher income tax yields as a result of less under-reporting.

The question we must ask is: How much will a reduction in VAT cost the economy?

A reduction in VAT from 20% - 5% would result is a direct loss of £5.5 billion (excluding alcohol). However, the research suggests that once the indirect gains from the reduction of VAT has been taken into account, the net fiscal cost would be between £0.7 and £3.1 billion. The research also suggests that the reduction in VAT would create between 290,000 and 670,000 jobs. An example of this was in early 2012, when President Nicolas Sarkozy declared the VAT decrease had saved 30,000 cafés and restaurants that were struggling financially. One other sector which could benefit enormously from the decrease in tax is hotel accommodation. As of January 1st 2012, 22 European countries had a reduced rate of VAT for hotel accommodation, while 13 countries had a reduced rate to cafés, pubs, restaurants and catering services. The cost of living in hotels is a danger to the UK tourism industry and we must keep prices competitive with those abroad. In order to bring this campaign to light, the VAT club organised a Tax Parity Day. This was held on the 25th September 2013, where over 44 businesses (15,000 outlets) across the country took part in campaigning and participating in Tax Parity Day. These included JD Weatherspoons and Punch Taverns. All businesses (40% restaurants, 60% pubs) which took part in the event lowered their prices by 7.5% in support of a VAT cut. Borel claims “If we compare with what has happened in Germany, Finland, Belgium and France, if you make a 7.5% price cut, you will have 25% more clients, which is very significant.” Borel also says that 10,000 pubs have closed and many others are suffering through insufficient investment.” This project however has not had much reception by the treasury. In short, we should all consider supporting lower VAT for food and drink in the hospitality industry, as this promises to boost the size of the industry whilst lowering the cost to us customers. So join supporters of this campaign such as Pret a Manger, Weatherspoons, Subway, and TGI Fridays, Pizza Hut etc, and campaign for fair VAT rates.