Hospitality Businesses Facing Pricing Dilemma

Following the Chancellor’s announcement in early July, hospitality businesses are facing a new challenge. The Summer Statement included a few welcome reliefs for businesses in this sector, but the reporting of the temporary reduction in the VAT from 20% to 5% has been less than clear. A saving of “£160 per household” has been headlined on the back of this reduction, but the Treasury has subsequently said that whilst it hopes businesses will pass on VAT savings to customers, recognises they have been without income for months so it would be there decision.

Why the mixed messages? Hospitality businesses have menu prices for food and advertised room rates for their accommodation. A reduction in the VAT rate doesn’t mean businesses will reduce their price, nor should they feel they have to. When we’ve seen changes to VAT rates in the past this doesn’t always lead to changes in price to customers. The right price for goods and services is ultimately what someone is willing to pay for them according to the availability of supply versus the demand for those good and services.

The availability of “supply” to customers is being hampered by a number of factors; businesses struggling to open safely, longer changeover periods for accommodation and reduced capacity in restaurants and bars. We’re also approaching the busiest time of year for many businesses in the sector, with many reaching their maximum occupancy and cover levels over the summer.

In terms of “demand” there’s a pent up desire for hospitality services arising from the lockdown period. Combine this with a reluctance of many to go abroad and the recently announced “Eat out to help out” scheme, and we should see a strong demand for hospitality services.

In my opinion, businesses should keep their prices at the normal rates in the short term. The reduction in VAT rate should be used to benefit the businesses which have been hit hard in this sector and recoup some of the losses over the past few months. Given time we may see businesses reduce their prices to attract customers and the VAT rate cut provides a greater latitude for doing this. However, most businesses already flex their rates with deals and offers during the quieter winter period and that’s when businesses can take advantage of the VAT rate reduction.

Many European countries have a lower VAT rate for hospitality services and I would hope we may see this reduced VAT rate maintained for an extended period, however, assuming the reduction in VAT comes to an end as planned in January 2021, accommodation providers may change their pricing behaviour and provide discounts on bookings paid in advance. Any amounts received prior to the uplift in the VAT rate will only be liable to 5% VAT, therefore, businesses may seek to incentivise early payment by sharing some of the VAT saving.

Let’s also spare a thought for many Guest House owners who are not VAT registered - this VAT reduction doesn’t help them. In fact, if all businesses passed on their VAT savings it would encroach on their segment of the market.

Having talked to a variety of businesses in this sector, there are customers seeking reductions in price following the VAT rate cut. My response to those customers is simple, businesses in the hospitality sector have had to endure months with little or no income. The VAT rate cut should be used to help these businesses survive and replace what has been lost over recent months. 

If you want to know more about applying the change in VAT rates, please read this article.

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