A 7.5% rise in VAT hitting the hospitality industry in London and the South East from October 1st will slow the recovery and even trigger permanent closures, a tax expert has warned.

The 7.5% rise in VAT for the hospitality industry will slow down the Covid recovery and could even cause a number of unnecessary permanent closures, according to Scott Craig, Partner and Head of VAT at Azets, the UK’s largest regional accountancy firm and business advisor to SMEs with offices in London and across the South East.

The original cut, from 20% to 5%, came into effect on 1 July 2020. From 1 October 2021, the rate will increase to 12.5% and this will apply until 31 March 2022. The rate applies to suppliers of restaurant services, hot takeaway food, holiday accommodation and admission to some attractions.

Scott Craig warns that the hospitality industry has not had sufficient time to benefit from the cut and some businesses could face permanent closure.

He said: “The UK has slowly reopened but remains in a state of uncertainty, and this has severely affected the hospitality industry. As restrictions have lifted, businesses have no doubt benefitted from the reduction in VAT but for some the increase to 12.5% comes too soon.

“Events are now being planned well into 2022 and beyond, and if the reduced rate of 5% had applied for a longer period of time businesses would have improved their financial position and have a better chance of survival. Increasing the VAT rate will reduce the income received by many and this could lead to unnecessary closures of businesses that could have been in better financial health six months from now.”

Scott Craig is urging business owners in the hospitality industry to get ready for the reintroduction of the full VAT rate of 20% on 1 April 2022. He added: “The Government’s scaling back of its Covid support measure is coming too soon for businesses with little or no cash reserves. It is vitally important these businesses are aware of and prepared for the changes. The hospitality sector should ensure it makes the most of the scaled back VAT cut before reverting to the full 20% in April and seeks professional advice if needed.”

Hotel turnaround specialist Tim Wedgwood, who also owns and operates the South Lawn Hotel near Lymington, said: “Something has to be done if the UK hospitality sector is going to bounce back. Whilst the temporary reduction in VAT is welcome, it has not provided that golden opportunity for the industry to burst back into life. The cost of food has risen dramatically and has completely written off any advantage the reduced VAT was intended for. Gross profit percentages on food sales have dipped from 80% to 62%, and wages costs which historically represented a third of sales in the hotel sector are rising sharply driven by the lack of labour post-Brexit.”

“With the reduction in VAT now being withdrawn the only solution would appear to be price increases but when relying to an extent on the public’s disposable income this has to be approached with caution. Reduced VAT is common throughout Europe and the rest of the world and UK hospitality urgently needs a similar long-term solution,” he concluded.