Yesterday saw the start of a six month long reduction in VAT for hospitality businesses, along with some attractions. Between 15th July 2020 and 12th January 2021 your local coffee shop will only need to charge VAT at 5% rather than the standard 20%. This is a much needed lifeline for the industry and a move which, coupled with a short but busy season, could help many survive the long winter ahead.
However there are already some customers heading into coffee shops with an expectation of lower prices. Their rationale: if VAT has been reduced then so will the price I have to pay.
Within hours of the Government announcement regarding the VAT reduction, I know of one local attraction who received queries about whether they would be dropping their prices. I have also spoken to coffee shop owners who felt in some way obliged to pass on the savings.
Let’s get this straight at the outset: the main aim of the VAT reduction is that businesses have to pay less of their profits to the Government thus mitigating in some way against the drop in revenue caused by lockdown and social distancing.
So how much is this VAT reduction worth?
When VAT is standard rated, for every £1 you spend in a coffee shop, around 17p is claimed by the Government. At 5% VAT this amount is reduced to just under 5p. The net result is coffee shops make an extra 12p for every £1 you spend.
Some businesses are likely to use this as a marketing opportunity, offering discounted products, and I have no doubt the larger chains will put a spin on this in some way. However, where small, independent establishments are concerned this income should stay in the business to help with costs both in the short term and in the months to come.
Since the beginning of lockdown we have been looking ahead to the first few months of 2021, knowing that this might be a crunch time for our local economy. Many local hospitality establishments, use the April to September period to make enough money to offset costs through the quieter months, particularly January and February. Whether these same establishments can generate enough income between now and October remains to be seen.
Now has never been a better time to support our hospitality industry. More of your spend is going to remain in the business, helping secure their future. If you direct that spend at local, independent coffee shop the impact will be even greater, as more of your spend will remain in the local economy.