VAT cut for restaurants, pub meals and hotels: what will it mean for you?

A £4bn VAT cut for the hospitality and tourism sectors was one of the eye-catching announcements in the chancellor’s summer statement. It could potentially save some bigger-spending households several hundred pounds.

What’s happening? At the moment, VAT (value added tax) relating to these sectors is charged at the standard rate of 20% which applies to most goods and services. But now the government has said that for the next six months it is cutting VAT on food, accommodation and attractions from 20% to 5%. VAT is a tax paid by consumers but collected by businesses.

What does this apply to? Lots of things, including meals in restaurants, cafes and pubs, and hot takeaway food bought from these businesses; accommodation in hotels and B&Bs and at campsites and caravan sites; and venues and attractions such as cinemas, theme parks and zoos. However, while the temporary lower rate applies to non-alcoholic drinks, it doesn’t apply to alcoholic ones.When is this happening? From 15 July until 12 January 2021.

Related: Pubs warn of closure risk after alcohol VAT cut exemption

So how much could I save? Daniel Lyons, the head of tax policy at accountants Deloitte, said: “The rate change could mean a range of savings for consumers. For a pub meal costing £45 without alcohol, a couple could expect to save £5.62, while a £54.50 one-night stay at a hotel in a family room would see a saving of £6.81. A family ticket to a theme park or zoo costing £144 could see a saving of nearly £18.”

But there is a big “but”.

What’s that? It remains to be seen whether businesses will pass on all, some or none of the savings to consumers, or pocket the difference themselves. Traditionally there has been nothing in place to force a business to cut its prices in line with any VAT cut, and some companies are likely to use the reduction as a way to rebuild their finances. However, the government has said that further guidance on the tax cut will be published by HM Revenue & Customs in the next few days, so perhaps we will find out more then.

Genevieve Morris, the head of corporate tax at accountants Blick Rothenberg, said it was “now a case of watch and see whether it is the consumer that benefits”. She added: “The indication from the chancellor’s statement is that he expects this to reduce prices and encourage spending, but many businesses that have had huge losses over the past few months may use this to boost profits by keeping headline consumer prices the same and pocketing the VAT saving – and who can blame them if they did?”

It’s a shame booze isn’t covered by the cut… Yes, this could prove to be a headache for pubs and other licensed businesses, as alcoholic drinks will continue to be liable to the 20% rate. Jamie Ratcliffe, head of indirect tax at EY, said there was already some confusion over how a business should treat product offerings where both hot food and alcohol is included – for example the “pie and a pint” offer.