VAT increase from 1st April crippling food pubs?

Anyone else's clients struggling since VAT increase?

Didn't find your answer?

I work for a number of pubs selling food and also a couple of licensed restaurants. Since the VAT was set back to 20% in April they are all struggling to the point they may not survive much longer.

They are all over the £150,000 threshold so don't qualify for FRS.

Am I missing something that I should be advising them on or do I just sit back and watch while they go under?

Are any other accountants witnessing the same thing?

Replies (38)

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By moboffsol
17th Oct 2022 22:34

Hopefully I'll receive a response tomorrow but would just like to add that paying full VAT on food sales when nothing can be clawed back on purchases has always been unfair imo.

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Replying to moboffsol:
RLI
By lionofludesch
17th Oct 2022 23:41

moboffsol wrote:

Hopefully I'll receive a response tomorrow but would just like to add that paying full VAT on food sales when nothing can be clawed back on purchases has always been unfair imo.

Accountants are in the same boat so I wouldn't expect a lot of sympathy if I were you.

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Replying to lionofludesch:
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By moboffsol
18th Oct 2022 08:31

Thank you for you're response but it isn't sympathy I'm seeking. I was more interested if others had noticed their clients in the food pub trades sinking faster than other industries. So far my other clients seem to be ok but that of course, may change in the coming months.

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Replying to moboffsol:
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By Mr_awol
18th Oct 2022 10:25

moboffsol wrote:

would just like to add that paying full VAT on food sales when nothing can be clawed back on purchases has always been unfair imo.

That perhaps demonstrates a lack of understanding in the VAT system.

The reason they cant 'claw back' anything on purchases is because they dont *pay* any VAT on purchases.

If they had to pay another 20% on top of their food costs, then naturally they would be able to recover it - but would be no better (or worse) off.

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By paul.benny
18th Oct 2022 07:47

Wage rates have been rising since the pandemic; employment costs have risen due to the NI increase and businesses haven't benefitted from the cap on domestic energy costs

On the demand side, don't forget that interest rate rises began at the end of 2021 and there was a sharp rise in both domestic energy costs and road fuel prices.

To blame the difficulties of the hospitality trade on a belief that the VAT regime is unfair is perhaps missing the bigger picture.

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Replying to paul.benny:
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By paul.benny
18th Oct 2022 07:52

But to suggest an answer to a question in the OP, hospitality is a sector with high fixed and fixed-ish costs, I would suggest looking at how to generate more revenue that will contribute towards those fixed costs: longer opening hours, selling coffee, breakfasts, afternoon tea. Promotional deals when trade is typically quieter - say Monday/Tuesday (eg 2 for 1, curry nights, etc).

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Replying to paul.benny:
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By moboffsol
18th Oct 2022 08:25

Thank you for your suggestions. Believe me they are trying everything within their power to keep afloat. I appreciate it is not only VAT which is causing the problem but hospitality (particularly food) are struggling more than other trades at the moment.

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Replying to moboffsol:
paddle steamer
By DJKL
18th Oct 2022 14:18

That is because the number of venues is predicated on a stronger economy, when the public is under financial pressure discretionary spending is impacted so some will require to close- they need to examine their business plan/model in light of the new economic realities.

They need to look at what might work in their premises e.g., sublet part/another activity done by A N Other , sublet catering keep bar trade etc.

Closing parts to reduce staffing may be possible, e.g. I used to work in clothing retail in the early 90s, when we had that recession we closed upper floors in two of our shops and only traded from the lower floors to save staff costs.

Other area could be say food waste or whether table waiting needs to be curtailed for a more self service model, or branching into takeaway.

VAT is not the issue the business model struggling to pay its costs is the issue.

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Replying to moboffsol:
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By gillybean04
18th Oct 2022 19:40

Hasn't that always been the case for the hospitality sector? That it's very difficult to make profit on food, and that's usually why they want an alcohol licence and why so many of them fail?

You say they've tried everything. If you see other businesses managing, then it would seem there is something they've yet to consider. Have they done market research with the locals and their customers? What was the feedback? Why are they choosing other businesses or what keeps them coming back?

Is the premises suitable for a franchise?

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By ireallyshouldknowthisbut
18th Oct 2022 09:07

Local to me are 3 food businesses.

One used to be a brilliant takeaway, but has cut back on ingredients, and I think looking like going bust as no-one goes in there any more. Food is terrible. They will blame their business failure on the recession, but its the food which they are selling at the same price for about 3 years.

One pub did really well over lockdown, but is quiet now. I don't think they did anything wrong, but is probably due to no.3.

Other pub (closed for over a year) has new owners, is really flipping expensive, but does excellent food which it seems enough people will pay a premium to eat. Packed solid and probably nicking all the trade from the other pub.

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By Jane Wanless
18th Oct 2022 09:11

It's not just 20% VAT. In many families or groups of friends, there's one person who is shielding or vulnerable. To make sure that person isn't at risk, the group decides to have a takeaway or cook a meal at the home of one of them. Do your clients offer deliveries, or can they screen different areas?
I'm in a drama group - cheap tickets and no VAT issues, and our sales are still well down, with people saying they're not happy coming out of the house and being with other people.

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Replying to janewanless:
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By SXGuy
18th Oct 2022 11:47

After 2 years of lock downs, a massive vaccination roll out, are you seriously suggesting people are still avoiding others? That's not what I've noticed.

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Replying to SXGuy:
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By paulwakefield1
18th Oct 2022 12:59

They are around here. Not that one would immediately notice it. But with vulnerable people (low immune systems, awaiting operations, sheer old age, etc.) then their friends and relatives don't want to put them at risk. If you go to the pub, it looks busyish but look for the regulars and a lot are missing for the reasons above.

Even if self imposed distancing is only for a week or two, it has an impact on trade.

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Replying to SXGuy:
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By DJKL
18th Oct 2022 14:33

Some are. Some still wear masks in supermarkets etc. I certainly keep my distance in same.

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Replying to janewanless:
By JCresswellTax
19th Oct 2022 10:21

janewanless wrote:

It's not just 20% VAT. In many families or groups of friends, there's one person who is shielding or vulnerable. To make sure that person isn't at risk, the group decides to have a takeaway or cook a meal at the home of one of them. Do your clients offer deliveries, or can they screen different areas?
I'm in a drama group - cheap tickets and no VAT issues, and our sales are still well down, with people saying they're not happy coming out of the house and being with other people.

Jesus is it March 2020 again!?!?

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By bernard michael
18th Oct 2022 09:19

The pubs I inhabit (not as MDTP) are divided between brewery owned tenancies and non tied freeholds . Both sectors have reacted the same way by putting their prices up and are starting to get back to pre Covid customer levels

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the sea otter
By memyself-eye
18th Oct 2022 09:30

My wife still does the books at a true freehold (held by the pub owners) with two food led houses, both doing good trade (albeit at much lower profit). I suspect they will gain from the fallout from tenanted pubs closing in the coming year, as they have no rent to pay and have their own micro brewery on site. Happy days- for some.

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VAT
By Jason Croke
18th Oct 2022 09:45

VAT is paid by the customer, collected by the pub and paid over to HMRC. In very simple terms, VAT should never be a factor in the profitability or operation of any business.

However, I do appreciate that VAT eventually feeds into the pricing of food/beverages in a pub, or any retailer, so this is more to do with competition and product offering than pure VAT alone.

When the VAT rate was reduced to 5% and then 12.5%, I saw little to no evidence of pubs and other outlets reducing their prices. Costa put their prices up a month after VAT was cut to 5%, and my local pubs had the same menu after the VAT cut as they did the day before and again, my local pubs have steadily increased their prices across the board, blame inflation, Brexit, the energy crisis, but VAT hardly factors into the equation in my view.

I know OP came here for sympathy and I do worry about the catering sector, but the first mistake is to blame VAT - as many businesses do - as per the start of this post, the customer pays the VAT, the only factor VAT has is the price customer pays, and I agree that customers vote with their feet and what I post here may be controversial, and that's fair enough, but if the pub isn't making money, it needs to increase its prices and look elsewhere to grow or diversify the business, but VAT shouldn't be the driving issue here.

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Replying to Jason Croke:
the sea otter
By memyself-eye
18th Oct 2022 11:42

These things are true but it is difficult to increase prices when the guy in the pub down the road is selling 'Cruddingtons head banger' ale at £2.80 a pint because he is:
a) stupid
b) crooked - no VAT no tax.
c) about to go bust, collect the cash and do a 'runner'
Also a quarterly VAT payment is often the largest cash payment in any one period (and therefore feels unjust).

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Replying to Jason Croke:
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By moboffsol
18th Oct 2022 12:23

I appreciate everyone's input which is the reason I made the post (not for sympathy) I am a one man band so no one else to discuss with (sad).
I know we shouldn't blame the VAT but they were doing fine whilst on 5%/12.5% as their profit/bank accounts were healthier. Obviously CT would be higher at the end of the year.
My clients are trying so hard to keep their heads above water. They have looked at increasing prices, changing the menus, cutting back on staff, negotiating with suppliers, pleading with the brewery for assistance, looking at all outgoings, but are still making significant losses each month and this is before the higher winter energy bills kick in.
So my post wasn't for sympathy but rather a plea to anyone, who may have clients going through the same, who could suggest something other than the above as nothing seems to be working. Incidentally, the wet led pubs are managing to keep their heads above water so maybe the answer is to stop serving food, which is what one of my clients are considering.

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Replying to moboffsol:
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By Paul Crowley
18th Oct 2022 13:26

Not convinced that a pub that used to do food, but does away with food, could easily replace the totals from diners (with drink) from new drink only clients.
I only go to a pub to have a meal
If pub stops food, I would go to a different pub or restaurant

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Replying to Paul Crowley:
paddle steamer
By DJKL
18th Oct 2022 14:36

If the numbers work consider getting an operator in to run the food side, they pay you a "rent" and staff it, you get the crossover trade re the drinks sold etc.

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Replying to moboffsol:
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By WhichTyler
18th Oct 2022 15:45

Rather than looking at the VAT increase, what has fundamentally changed since before covid for your clients? Is it footfall? Revenue per customer? Wet/dry sales split? Margins? Staff costs? (restaurant accountants reporting that staff costs now 35% of revenue, not traditional 30% as pool of available staff dries up)

FWIW Every bar/restaurant/takaway I use has put up prices since Brexit & Covid

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Replying to Jason Croke:
RLI
By lionofludesch
18th Oct 2022 17:53

Jason Croke wrote:

VAT is paid by the customer, collected by the pub and paid over to HMRC. In very simple terms, VAT should never be a factor in the profitability or operation of any business.

However, I do appreciate that VAT eventually feeds into the pricing of food/beverages in a pub, or any retailer, so this is more to do with competition and product offering than pure VAT alone.

When the VAT rate was reduced to 5% and then 12.5%, I saw little to no evidence of pubs and other outlets reducing their prices. Costa put their prices up a month after VAT was cut to 5%, and my local pubs had the same menu after the VAT cut as they did the day before and again, my local pubs have steadily increased their prices across the board, blame inflation, Brexit, the energy crisis, but VAT hardly factors into the equation in my view.

I know OP came here for sympathy and I do worry about the catering sector, but the first mistake is to blame VAT - as many businesses do - as per the start of this post, the customer pays the VAT, the only factor VAT has is the price customer pays, and I agree that customers vote with their feet and what I post here may be controversial, and that's fair enough, but if the pub isn't making money, it needs to increase its prices and look elsewhere to grow or diversify the business, but VAT shouldn't be the driving issue here.

Mmm - to be fair, Jason, I didn't expect a price reduction. I always saw it as a temporary Covid subsidy.

I've always said, though, that VAT is a tax on the retailer, not the ultimate consumer. The price of Nesquik shows that.

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Glenn Martin
By Glenn Martin
18th Oct 2022 12:20

The hospitality sector has gone through a perfect storm of negative events that have left many really struggling.

Rent arrears - many carry large rent arrears from lockdowns which are now coming to a head.

Staff Shortages - Many having to reduce opening times to those that can be staffed plus have been hit with a large increase in cost for staff in general.

inflation - costs of food gone up a lot which impacts on cost to customer if passed on.

Energy - many considering closing over winter in quiet times through cost of heating venues.

Covid Legacy - many carrying debt from Covid period and venues just not as busy through cost of living crisis.

I met with an IP last week who expects a large number of vendors will trade up to Christmas to get what trade they can then hand keys back in new year. Then hopefully these sites will be re purposed and open clean of debt and problems at Easter time.

a return to the 5% vat rate would help with margin but not sure it would overlay change the outcome for many as they past that point now.

The cost of going out now is really huge, and with many worrying about paying bills your leisure money takes a hit.

city centre will likely survive ok village pubs and rural venues will likely disappear at a rate of knots

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Replying to Glennzy:
paddle steamer
By DJKL
18th Oct 2022 14:56

Edited

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Replying to Glennzy:
paddle steamer
By DJKL
18th Oct 2022 15:04

They are already, fair few for sale on Rightmove Commercial as I review it regularly to see if any properties we like .(Especially if cheap and the properties might be capable of alternative use.)

If on main road there do seem to be buyers eventually (though possibly with dropped prices), if back roads/smaller villages they struggle.

Catch is if the villages do not sort say a community buyout (and a lot of them fail) the closure of the last pub can spell the end for the community.

Here is one I have been watching, lot of property per £1 . I am looking to maybe retire to the Borders so might make a large pleasant house or maybe I should become mine host.

https://www.rightmove.co.uk/properties/127742732#/?channel=COM_BUY

Or another:

https://www.rightmove.co.uk/properties/111590996#/?channel=COM_BUY

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Replying to DJKL:
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By Hugo Fair
18th Oct 2022 17:06

Well, you wouldn't be short of toilets for your guests if you bought it as a "large pleasant house" ... but you'd have room for an open-air car museum outside!

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Replying to DJKL:
Glenn Martin
By Glenn Martin
19th Oct 2022 12:52

Look nice properties, as I now live in the English borders I could go fishing with you when you retire.

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Replying to Glennzy:
paddle steamer
By DJKL
19th Oct 2022 15:10

I would need to buy one with some fishing rights.

Every so often the odd house comes up with a stretch on some of the lesser waters. Best property to date was a property at Killin (not Borders) with a small jetty with boat access to Loch Tay, but other half was not impressed.

I tend to be a trout from boats individual if I do ever get to fish, rivers have far too many overhanging fly catchers for my wayward casting . (Trees)

Of course buying a hotel would likely be the end of any attempts to fish as I would have no time, it is probably a very bad idea.

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By bernard michael
18th Oct 2022 13:52

The other answer which one pub has tried is to close Mon & Tues and only open the kitchen on Friday, Sat & Sunday

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Replying to bernard michael:
the sea otter
By memyself-eye
18th Oct 2022 18:15

Many pubs close on those days..
Thankfully not the one I drink in.

Hick!

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By moboffsol
18th Oct 2022 20:00

Thank you all for the feedback.
I have suggested franchising the kitchens and they are seriously considering this idea.

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By alejandra
19th Oct 2022 09:54

It would be worth checking how their tills are programmed, and a look at their VAT receipts (by which I mean the VAT receipt they would issue to a business customer, if asked). We went to a local pub for a staff meal, and the VAT receipt showed overall we were charged 28% VAT (from memory). I emailed them about it and even dropped by to speak to the manager, but they insisted everything was correct so I gave up. So I presume they continue to hand over more VAT than they need to.

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By JD
19th Oct 2022 10:15

It is indeed tough for them at the moment, but success or failure is not determined by the VAT rate, IMHV.

My clients tend to split down into what I call the generous cook sector, who provide an excellent service but operate on very limited margins, and those who are rather more professional, understand how to define their product (what goes on the plate/menu), how to price, and where the margins are.

This is an area where regular (monthly) profit and loss, management information has proven to be very helpful.

Sadly, the generous cook sector tend to be the ones that need this information most but are the least interested, with inevitable results no matter how hard they work or what the VAT rate may be at the time.

If you wish to benchmark what is going on with yours, the British Beer & Pub Association do some useful costings annually based on differing styles of venue.

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Replying to JD:
paddle steamer
By DJKL
19th Oct 2022 11:09

Yes, detailed food costings are quite an exercise in high end restaurants, they get undertaken before a dish hits the menu and are I understand pretty time consuming to prepare, as is food waste analysis. The catch is the food cost as a percentage of sales in these types of offers can be low and it is more often the labour costs that kill. (We used to have a business interest in a Michelin starred restaurant where I attended the odd meeting but it had its own accounts/ management team who prepared all the analysis)

Best restaurant I ever saw for margin re food cost was an Italian one I did accounts for years ago, they made their own pizza dough and pasta and their food cost was less than 20% of net sales.

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Replying to DJKL:
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By JD
19th Oct 2022 14:11

As it happens, I use a mythical Italian place as an example to clients. Half a dozen cheap ingredients (pasta, cheese, tomato sauce, mince, peppers and so on) and you have most of the menu that one would wish to produce, covered.

High margin and minimal waste. You are correct, reliable staff/staff costs is just as important.

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John Hextall
By John Hextall
19th Oct 2022 11:03

I read an article about some pubs offering accommodation for people who would otherwise be working from home. Can't remember exactly how it worked but it seemed to cost £10 a day for which the worker got warm space, free wifi and electricity, maybe some tea/coffee and the opportunity to get lunch?

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