The UK chancellor Rishi Sunak has declined the opportunity to extend the 12.5% rate of VAT for the hospitality industry, with the levy set to go back to 20% at the start of next month.
It had been lowered to 5% in the summer of 2020.
Many in the industry were hoping that Sunak would use his spring statement to freeze VAT at 12.5% but are now having to contemplate potential price rises as a result.
“This is a real setback for thousands of UK hospitality businesses still suffering the devastating effects of Covid, and facing a tidal wave of rising costs. For many businesses, the removal of the lifeline of a lower rate of VAT might prove fatal,” said Kate Nicholls, CEO of industry body UKHospitality.
“For a heavily, disproportionately taxed sector a return to 20% dashes the hopes that many businesses could begin to recoup some of the losses of the last two years.”
If hotels do pass on the rise to consumers it will increase the pressure on discretionary spending. Energy prices have skyrocketed in recent months as have petrol and diesel prices, squeezing many families’ finances.
“While we appear to be seeing the green shoots of recovery for international holidays, nearly twice as many adults booked a UK holiday during January – the highest incidence since start of tracking.
"Comfort with the idea of staying in hotels (in particular), but also other types of paid-for accommodation jumped significantly as Omicron-driven fears receded. In general, the accommodation sector is closing in on the pre-pandemic norm in terms of consumer comfort levels,” said James Bland, director at consultancy BVA BDRC.
“What remains to be seen is whether this recovery will endure, or whether it is one final hurrah before the cost-of-living crisis really starts to bite. The energy price cap increase doesn’t kick in until April, meaning that while people know costs will increase, the reality of a larger bill perhaps hasn’t yet reflected in bank accounts. That’s to say nothing of any economic repercussions that will follow Putin’s war on Ukraine, whether it concludes quickly or remains for some time to come.”