UKHospitality is calling for VAT on hospitality to be cut from 20% to 10%. The appeal is obvious: hospitality is under pressure from higher wages, rents, energy costs and fragile consumer confidence. But the proposal is much larger than it first appears.
In response to a parliamentary question, HMRC estimated that reducing the standard rate of VAT from 20% to 10% across accommodation and food and beverage services would cost the Exchequer £10.5 billion in 2026–27.
For context, that’s roughly equivalent to the operating budget of the Foreign, Commonwealth & Development Office, or more than twice the budget of the Department for Culture, Media and Sport.
Presumably not all hospitality businesses are within the scope of UKHospitality’s proposal. But this isn’t clear because its website provides scant detail and no fiscal analysis. Assuming the proposal is restricted to eating and drinking establishments — such as restaurants, bars, pubs and cafés — this segment of industry’s VAT contribution may be around £8 billion a year. Cutting the rate would therefore reduce receipts by up to £4 billion annually.
Some of this would be recovered through higher spending, increased corporation tax receipts, higher employment tax receipts and additional VAT generated elsewhere in the economy. Even with generous assumptions, however, the net cost could still be £2 – 3 billion a year.
That makes the proposal politically and fiscally difficult. The Treasury will ask why this money should be spent subsidising meals and drinks when the same money could fund public services, reduce broader taxes or support lower-income households more directly. The sector can argue that hospitality is labour-intensive, place-based and socially valuable. But many sectors can make similar claims.
The problem isn’t VAT
The bigger problem is that VAT is a blunt instrument. Some of the benefit would go to consumers through lower prices; some to landlords and suppliers through higher demand; and some to stronger operators through improved profitability. Remember, just 2% of businesses account for 75% of all VAT receipts. There is no guarantee that a VAT cut would benefit the businesses under the greatest pressure.
A more credible and relevant ask would be targeted relief where hospitality’s pressures are most acute: reforming business rates, reducing employer NICs, improving apprenticeships and training, and simplifying planning, licensing and outdoor trading rules.
Hospitality needs support, but a permanent VAT cut is an expensive, leaky and politically vulnerable way to deliver it. The industry’s diagnosis is sound, but its current proposal will prove too hard to swallow.
