Restaurants warn prices will rise due to VAT hike

Restaurant owner Salima Vellani, said many businesses in the sector were already "hanging by a thread"

Restaurants and pubs are warning that prices will go up due to a rise in VAT rates, which takes effect from Friday.

Owners said the increase from 5% to 12.5% was badly timed, with one restaurant chain owner saying businesses were already "hanging by a thread".

Trade bodies have called for a halt to any further rises in VAT, to help the industry recover from the pandemic.

The government said hospitality had received "extensive support".

VAT - the tax paid when buying goods or services - has been levied at a reduced rate in pubs, restaurants and other hospitality businesses since July 2020 to help them stay afloat during the pandemic.

The sales tax won't return to its pre-pandemic rate of 20% until April 2022.

However, Salima Vellani, founder of restaurant chain Absurd Bird, told the BBC she was "extremely concerned" about the increase to 12.5%, which she said was a blow to the hospitality industry.

"It's just one thing after the other that we are being hit by," said the chief executive, who runs five chicken restaurants across the country.

"We are all hanging on by a thread. We are going to have to put prices up."

• What is VAT and how does it work?

Chancellor Rishi Sunak said the 5% rate was designed to "get the sectors moving and to protect jobs".

The hospitality and tourism sectors have been hit hard by the pandemic, with many venues closed altogether during lockdowns, and then catering to limited numbers due to social distancing measures. Now staff shortages are preventing some making the most of the recovery.

David Moore, the founder of Michelin-star restaurant Pied à Terre, said he had already told one customer who had a £95 voucher for a 10-course menu, that their meal would now cost £105.

He said the government "could not have picked a worse time" to implement the VAT increase, with his business having to cope with rising import, energy and staffing costs.

"It just does not feel like life is back to anywhere near like normal," he added.

"We just have so many price rises across the board. The utilities are horrendous. The VAT [rise] is not something I can absorb. Every single supplier has increased prices.

"It's not just vegetables, or just meat, everything is more expensive than it was two years ago."

His restaurant was also currently "massively understaffed" he said, sometimes meaning table numbers had to be reduced at peak times.

• Is there a solution to the hospitality staff crisis?

• What's in short supply and why?

• What impact has the furlough scheme had?

For Sue Whiston, finance and operations director at Kuula Poke, a Hawaiian restaurant in Birmingham, the VAT increase was "premature". She believes the 5% rate should have been extended for another six months.

She said shipping costs to source Kuula Poke's produce, from countries such as Japan, China and Thailand, had "shot through the roof".

Sue Whiston says her costs are "through the roof"

"Mango is something that we buy in hundreds of kilograms at a time, (it) has suddenly overnight increased by 20%," she said. "We have had problems with food availability.

"Only this week along our main Japanese wholesaler has turned around and said to us they can't make any deliveries to us this week because of the shortage of diesel fuel.

"So right now we are in this perfect storm of inflationary pressure and VAT is about to go up.

She expects prices for diners to rise across the sector.

Rob Pitcher, the chief executive of Revolution, predicts there will be further price increases next spring when the VAT rate increases to 20%.

The boss of the bar chain, which has 66 venues and employs about 3,000 staff, said businesses could not afford to take on the extra cost, and so it would be passed on to the customer.

"The consumer is going to end up paying twice," he said.

Trade bodies, including UK Hospitality, the British Beer and Pub Association, and Tourism Alliance have called on the government to make the 12.5% VAT rate permanent, rather than increasing the rate again in the spring, to safeguard the future of businesses and protect jobs.

In a joint statement, they said returning VAT back to 20% would have "serious consequences", with six in 10 businesses noting in a survey that it would "likely lead to cutbacks and job losses".

Kate Nicholls, chief executive of UK Hospitality, said keeping the VAT rate at 12.5% would be the "most effective" move by the government to "secure a more rapid recovery and rebuild resilience faster".

But a Treasury spokesman said the government had "always been clear" that lower VAT rates were a "temporary measure to support businesses as they recover from the pandemic".

"The hospitality sector has benefited from extensive support throughout the pandemic through our £400bn Plan for Jobs, with the furlough scheme, grants, tax cuts and deferrals," he added.