As a result, restaurants and bars have warned that prices would rise as a result of a rise in the VAT rate. This would inevitably affect consumers as they will now have to pay much more when dining out at restaurants and other establishments.
What is VAT?
VAT, or value-added tax, is a tax that you must pay when you buy goods or services.
In the United Kingdom, the standard rate of VAT is 20%, and roughly half of all products purchased by families are subject to this rate.
Any VAT will have already been added to a price when you see it in a store.
Various products, such as most supermarket foods, children's clothes, periodicals and magazines, are also VAT-free.
The new reduced rate of 12.5% VAT was first introduced on the 1st of October 2021. For more information on the 12.5% VAT rate, read our blog post, “Is your business ready for the 12.5% VAT increase?”. In this post, we discuss why this was implemented by the government and how it may affect your business and accounting needs in the near future.
What impact does this have on businesses and their personnel?
As the UK economy recovers from the pandemic's impacts, numerous businesses have reported staffing shortages, with job openings in the UK reaching their highest level since March 2020.
The hotel industry has also been impacted harder than others, having to shut down operations and operate under severe limitations during lockdowns.
Prior to Brexit, a large portion of the UK's hospitality industry was made up of foreign employees, particularly those from the EU. However, hundreds of thousands of foreign workers departed the UK in 2020, and it is uncertain if they will return.
1.3 million foreign workers left the UK during the pandemic, according to UK Hospitality.
Mr Moore, a restaurateur, claimed he received 800 applications for a receptionist position in November 2020, but only seven individuals responded when he re-advertised the position three weeks ago, and no one showed up for an interview.
He also claimed that Brexit was the largest cause behind personnel shortages and that the "heartbeat" of the hospitality sector was young people coming from overseas to get life experience and new skills through working in restaurants and bars.
Although many argue that Brexit posed a major threat to the industries, a UK government spokesperson has defended the state’s decision to gradually remove these temporary measures, stating,
"We want employers to focus on training and investing in our domestic workforce, rather than relying on labour from abroad. Employers should focus on getting people in the sector who are benefitting from the furlough scheme back to their roles when restrictions end.”
Why has the UK government introduced a 12.5% VAT increase?
Kate Nicholls, the current chief executive of UK Hospitality stated that the 12.5% VAT rate is the ‘most effective’ measure that was implemented by the UK government. She added that the current 12.5% VAT rate would "secure a more rapid recovery and rebuild resilience faster".
UK Hospitality, The British Beer & Pub Association, and Tourism Alliance have all unanimously called for the UK government to make the current 12.5% VAT rate permanent. They have stated that this will enable them to safeguard the heavily affected sectors aforementioned. If the government continues to implement further VAT rises then many restaurants, bars and other hospitality businesses will be completely overwhelmed.
On the contrary, the Treasury has already made their stance clear on the topic at hand, they have reiterated that the lower VAT rates were only intended to be a “temporary measure to support businesses as they recover from the pandemic".
The sudden rise in VAT rates can be stressful and confusing for many businesses and individuals, especially during these unsteady times. We at Persona Finance are well-equipped and prepared to answer your questions about how the new reduced rate of VAT will affect your business, and for any other business and accounting queries, you may have. Please contact Persona Finance at [enquiries@personafinance.co.uk] for more information.
