VAT cut for restaurants will not help while social distancing remains, IFS warns

Cutting VAT for restaurants will not help businesses while strict social distancing remains, the Institute for Fiscal Studies (IFS) has warned.

The Chancellor yesterday announced that VAT in the hospitality and leisure industry would be cut from 20 per cent to five per cent in a bid to protect 2.4 million jobs.

However, economists have warned that many businesses in the sector are still constrained by capacity because of social distancing rules.

The IFS’ deputy director Helen Miller said that many restaurants are “as full as they can be” given the constraints, meaning “this policy would effectively be a giveaway without very much fiscal stimulus”.

Ms Miller said: “With the VAT cut, I’d actually expect firms to benefit to a large extent. Many firms will choose not to pass through the VAT cut to consumers.

“Now of course, that will be helpful to those firms that are struggling, it will give them some extra income. But the firms that benefit most will be those who have the highest sales and are operating closest to normal.”

She said the policy was therefore “quite a poorly targeted giveaway” that will not benefit “those firms that are struggling the most”.

Rishi Sunak yesterday announced the tax cut to give businesses in the hospitality and leisure sector confidence that "the demand will be there" as they reopen their doors.

From next Wednesday until January 12, VAT on food, accommodation and attractions will be charged at five per cent.  The measure will cost an estimated £4.1 billion, according to the Treasury.

The IFS’ director Paul Johnson questioned the “timing” of the announcement.

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.”

Ms Miller added: “If it’s the case that we can't increase output anymore given the social constraints, now is not the time for a fiscal stimulus. We're effectively going too early.”

However, Jane Pendlebury, chief executive of the Hospitality Professionals Association (HOSPA), called the chancellor’s interventions a “huge relief”.

Ms Pendlebury said: “The reduction in VAT is absolutely massive news for the hospitality industry.

“The reduction will provide businesses operating on wafer thin margins with some essential breathing space, helping them to recover and rebuild, as well as to retain more jobs.”

The hospitality industry is the third largest private sector employer in Britain representing around 10 per cent of UK employment.

Mr Sunak vowed that his “catalyst for the hospitality and tourism sectors” would benefit more than 150,000 businesses and help protect 2.4 million jobs.

UK Hospitality chief executive Kate Nicholls described the sweeping changes as a “huge bonus” but conceded social distancing measures could hamper revenue.