Coronavirus: Will the hospitality industry pass on VAT cuts to consumers?

The hospitality and tourism sectors are set to benefit from a reduction in VAT from today - but there are concerns the savings might not be passed on to consumers.

More than 80% of hospitality firms stopped trading in April due to the coronavirus lockdown, according to data from the Office for National Statistics.

Last week, Chancellor Rishi Sunak announced a cut in value added tax (VAT) from 20% to 5% in an effort to boost the industry.

The new rate will be for food and non-alcoholic beverages in restaurants, cafes and pubs as well as hotel accommodation and entry fees to certain attractions, until 12 January.

But some experts have questioned whether the move will result in cheaper prices for customers and whether it is even the right way to help the recovery.

Hinesh Patel, portfolio manager at Quilter Investors, said: "The government is gambling on the public to head out and spend, spend, spend in one of the hardest-hit sectors to get the economic cycle rebooted.

"It remains to be seen if businesses will pocket the difference or pass on the saving to patrons."

Starbucks reportedly said it would pass on the 15% discount for coffee served in company-operated stores and McDonald's said it had recommended its franchisees should cut prices on products such as the Big Mac and Quarter Pounder.

Paul Johnson, director at the Institute for Fiscal Studies, added that it might have been better to wait before cutting the tax, to see what the sector's main challenges are.

He said: "Maybe it would have been better to wait until we know whether the real problem is on the demand side - people need to be encouraged to go out and eat - or on the supply side - with social distancing restaurants can't serve enough people."

There is also confusion about which items qualify for the VAT rate cut.

Jamie Ratcliffe, head of indirect tax at the consultancy EY, said: "There is a body of case law around when is food not food but catering, and already there is confusion among retail outlets over the categorisation of certain product offerings that contain both hot food and alcohol, for example the pie and a pint offer.

"Other businesses may be unwittingly caught by this - shops that have a restaurant; hospitals that provide catering and all businesses will need to determine if both purchases and supplies fall within the new reduced rate or not."

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When VAT was last cut in 2008, almost four in five businesses reported passing the saving on to their customers, according to the Treasury.

According to EY, the reduction of VAT to 15% during the global financial crisis resulted in a 1.2% increase in retail spending benefiting both customers and businesses.

A report from independent think-tank the Resolution Foundation also showed that around 22% of new jobs for unemployed people in 2010 and 2011 were in the hospitality sector, which could now be a key contributor to economic recovery post-COVID-19.