An exchange of views on twitter earlier this week relating to the Chancellor’s upcoming budget next Wednesday, led us to invite Nicholas Russell, MD Balbirnie House in Fife, Scotland to air his view’s with our readership.
We hope you find Nicholas Russell’s view of how VAT could be applied to hospitality as compelling as we have.
Nicholas Russell: So here we are, spring 2021. Is that light we can see at the end of the Covid hospitality tunnel, or is it the train’s headlights coming towards us?
Money makes the hospitality world go around, so as always to ensure survival it’s down to considering the financials. Back amongst the normality of 2018, Hallidays delivered a Hotel Industry Sector Report which defined that Hotel Benchmarking Data showed the average for hotel financial performance, was to make 13.18% net of VAT revenue.
Specifically, the 13.18% figure was expressed as EBITDA, Earnings Before Interest, Tax, Depreciation and Amortisation. However, the amount that a hotel actually makes is usually very significantly less than 13.18%, because you then need to factor whatever is due on an outgoing and ongoing basis to bank lenders, in terms of combined interest and capital repayments. Many hotels do well simply to break even.
The usual reality is that most hotels will do very well indeed to set aside funds on an ongoing basis for the necessity of ongoing repairs, renewals and refurbishments, and still be left with any profit thereafter, at the end of the financial year. And this then takes us to the challenge now facing the future of hospitality, being left with a few % at most at the end of a financial year, but now also needing in addition, to make additional new bank repayments. These are for BBLS (Bounce Back Loan Scheme) and CBILS (Coronavirus Business Interruption Loan Scheme), on an ongoing basis as well. Adding to the previous challenges!
So, what should government be doing to provide a logical framework which not only helps to ensure the financial survival of those hospitality operators which have survived the Covid pandemic? And what should government be doing not only to ensure survival, but to also create dynamics which will enable new start potentials, for the entire hospitality sector to flourish with renewed and modernised dynamics?
Many parts of the existing surviving hospitality sector has survived 2020 because of the ‘by circumstances alone’ introduction of new technology, new systems, and new capabilities which have delivered unprecedented new revenue streams. Properties which have introduced online ordering, takeaways, and Click’n’Collect, these will have ongoing new capabilities to add to previous business models, but these are certainly not ‘one size fits all’ permanent financial solutions across the span of hospitality.
Scotland has already confirmed a further 12 month extension on Business Rates Relief, that’s a good starting point. A national Apprentice Scheme is offering employers £5,000 per new Apprentice. A few technology grants have been delivered, more are needed. Grants are also needed for investments into new green and sustainable energy sources, and anything that can reduce environmental impact. All these aspects are required, they would all assist, but they are certainly not a combined long term solution for enabling continued financial viability.
The most relevant solution lies in a continued reduction in the rate of tourism VAT. The rate is currently reduced from 20% to 5%, and the entire sector is calling for this to be sustained in the next Westminster budget on March 3rd, 2021.
Extending such a reduction for a full year would be relevant, but that doesn’t create sustainability beyond that one year timeline, during which the BBBLS and CBILS payments initiate. Tourism VAT therefore needs to be held at reduced rates at least until BBLS and CBILS loans are repaid. That, is a necessary solution across the span of hospitality. For years.
Such a permanent reduction in tourism VAT should not be viewed as being either unusual or radical, in actual fact it’s more relevant to view a permanent reduction as normalisation.
This is defined on an ongoing basis by the Cut Tourism VAT campaign, which was launched back in 2012.
The Cut Tourism VAT Campaign is now calling for this present rate of 5% to become permanent, which would enable businesses to invest, and stimulate sector growth. The Campaign is a coalition of 35 major hospitality and tourism groups, 45 national and regional associations and 48,000 hospitality and tourism businesses employing 3.2 million people.
The rate of Tourism VAT needs to be brought into line with competitor destinations throughout the rest of Europe. Reducing tourism VAT would help lower prices, but also allow businesses to increase investments. In addition, this measure would increase eventual tax revenue.
In Scotland’s circumstances 44 of 59 MPs have previously been in favour of such a move. The decision however is reserved to Westminster. The Cut Tourism VAT campaign has massed political support across the entire political spectrum, now is the time for politicians to step on up and deliver.
News from the hospitality and catering industry is also being featured extensively in our Facebook and twitter social media accounts with the opportunity to engage with others in hospitality and share your views.
Hospitality & Catering News: Call on Chancellor to set hospitality VAT rate permanently at 5% in budget. – 25 February 2021 – Call on Chancellor to set hospitality VAT rate permanently at 5% in budget.
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