VAT on hospitality and setting your prices

The reduced VAT rate of 5% for the hospitality industry is due to end on 30 September 2021. It’s time for businesses to consider how this will impact their trade.

From 1 October restaurants, pubs, hotels as well as other hospitality and leisure businesses will be required to charge customers 12.5% VAT. If these businesses do not change their prices, they will end up with less money in their pocket.

At the moment, for every £100 a hospitality business takes at 5%, they will pay £4.76 of VAT to HMRC. The rate of VAT is gradually being returned to 20% VAT, meaning that from 1 October 2021 they will have to pay £11.11 to HMRC and from 1 April 2022 this will increase to £16.67.

There are some sales that won’t be affected. For example, the reduced rate does not apply to alcoholic drinks where 20% has been charged throughout the pandemic; and cold takeaways which can be sold with 0% VAT.

To prepare, we recommend that our clients:

  • Review their prices,
  • Prepare till systems for the change,
  • Save for their VAT bill,
  • Constantly monitor their business’ performance.

Reviewing prices

One way to mitigate the cashflow impact is to pass this additional VAT charge on to customers. For example, increasing the price of a meal from to £10.05 to £11.20 would mean that you keep just as much money from each sale.

Is it fair to increase prices?

Last year, the VAT rate was reduced for hospitality to relieve the pressure on businesses who wanted to open but had to comply with the strict rules limiting venue capacity. The extra profit was supposed to help businesses cover their fixed costs when trading with one hand tied behind their backs. So, many business owners did not pass the VAT saving on to their customers.

Does this mean that it is unfair to increase prices now that the rates are increasing again?

We have always encouraged businesses to review their prices regularly regardless and this year is no different. I would argue that reviewing prices is essential, and since the cost to purchase both goods and staff is increasing, it would seem fair that prices increase too.

However, demand for leisure is impacted by price and so rather than simply asking whether it is fair to increase prices it is also important to ask whether your customers will be willing to pay more.

Leisure is discretionary spend

For many consumers, their hospitality and leisure is discretionary – they do not need to spend the money but they choose to for their enjoyment. Therefore increasing prices can reduce demand. This might be that customers visit less often, or that when they do they cannot spend as much.

A menu that contains a variety of price points may help to mitigate this. This would give customers a fair priced product to encourage them to visit, but also offers more expensive options for those who can afford to spend a bit more.


Competition also has a big impact on the elasticity of demand. Consumers will be comparing your prices and quality of service to your competitors. Online price lists and food delivery apps have made it incredibly easy for customers to compare your prices to those of your competition before they choose to visit.

It is vital to keep a close eye on your neighbours pricing. After all, your customers will be and they will vote with their feet if they can get a better deal elsewhere.

When listing your competitors, start with business that offer the same products as you but do not stop there. Think from your customer’s perspective. If you had a spare £50 in your pocket, what might you spend it on? For example, they might be weighing up whether to go out for dinner, get a takeaway, or maybe visit the cinema.

Brand loyalty

Brand loyalty will play its part too. If you have spent effort building up a loyal customer base, they are unlikely to be visiting simply because of your price; they are probably visiting because they trust that you will deliver a consistent service. Brand loyalty will help you to retain customers when you your prices change.

We were discussing this at work and I asked the team whether they would remain loyal to a coffee shop if the prices increased. One person answered, “I have a favourite coffee shop in Taunton. If they put their prices up by £1 I would probably still visit them because it’s my favourite place in town.”, someone else chipped in “But, if I’d never been before, the high prices might put me off. It might be harder to attract new customers.” This is the impact of brand loyalty. If your customers love you and trust what you do, they will be more forgiving price increases.

Marketeers will tell you how much cheaper it is to look after existing customers rather than finding new ones. So, when thinking about pricing also consider how to build and retain a loyal customer base.

Constantly review prices

It is incredibly difficult to predict demand at the moment. Whereas in previous years, you could almost predict demand based on the weather alone, this year has been completely different. The news, local and international lockdown rules and sporting events are all having a big impact as well.

With the future remaining very uncertain, it makes sense to constantly review prices instead of seeing this as a once-a-year exercise. Making changes little and often will generally be better accepted by customers rather than large changes. Maybe one product isn’t selling very well and its price needs changing. Maybe something is selling very well and you might consider creating a similar product with an even higher price point to enhance your offering.

Preparing for the change

Once you have decided on your new prices you will need to start preparing for the change.

Decide when you will introduce the changes. Wil your customers react more favourably if you wait until 1 October? If you think customers will be forgiving of a price increase, why wait until October? Making the change sooner gives you an opportunity to make additional profit before the rate changes.

How long will it take to get new menus and price lists printed? There could be quite a few businesses changing prices at the last minute so it might be wise to get yours printed early.

Will it be easy to update till systems and delivery apps? Not just for pricing but also for the new VAT rate. Ensure you have all of the right log-in details and know-how so that you are ready to make the change. Look to the software companies to see whether they have developed any automatic features that could speed up making the change.

Getting your software set up right is really important. Over the last year we have met a few business who were not ready to make the change and ended up having to review their sales reports with a fine tooth comb each quarter to ensure that they were not paying the wrong amount of VAT to HMRC. A little bit of preparation now can save a lot of time in the future.

Regardless of how you prepare, hospitality businesses will see their VAT payments to HMRC increase. This will impact cash flow. Too often we see business owners spend money that is in their current account without realising that they should have kept it to pay their VAT bill.

We recommend keeping a close eye on your accounts so that you know how much you will need to pay HMRC. Some of our clients use their monthly management accounts to do this. The accounts will clearly show you how much VAT you owe to HMRC.

Other businesses choose to put money aside each week ready for their tax bill. Moving tax money into a savings account can help ensure that you do not accidently spend money that you will need to give to HMRC.

Save for your VAT bill

VAT bills for hospitality businesses are often incredibly painful. They have to charge VAT on most of their sales, but cannot reclaim on food or on staff. It is vitally important that businesses remember that their next VAT quarter could be considerably more expensive that those over the last year.

I recommend planning ahead for this. Work out how much VAT you have taken each week from customers and, if possible, put this in to a savings account ready for the day that HMRC take their money. If this is not possible, remember that you are effectively borrowing money from HMRC. Keep track of how much your bill will be and how much money you need to find before the deadline.

If you find you cannot pay, whether this is to do with the impact of coronavirus or not, it makes sense to talk to HMRC about this. It can help mitigate some quite painful penalties. HMRC have helplines available for taxpayers who are struggling to pay their tax bill.

There are plenty of people who can help you when you are running out of money. Please do speak to us or your trusted business adviser for support.

Monitor performance

Once you have decided upon your new prices, work out the impact you expect this to have on your business. Build a picture of how your sales will change, as well as what it will cost to do business. When doing this, do be sure to consider the changing price of staffing.

You will end up with a forecast for your business’ performance. If this forecast gives you the results you need, then you have a plan that you can work towards.

Come back to this forecast after a few weeks and again each month. Consider how your actual results shape up against your predictions. Then, revise your predictions for the coming month. Keeping a close eye on your sales vs your expectations is vital to making strategic decisions about your business’ future.

Helping business owners monitor their performance is something we are proud to specialise in as a firm. When used correctly, management accounts are a fantastic tool for doing this.

Planning your entertainment

As a little aside, it is not just hospitality businesses who need to consider the impact of these changes. Any corporate entertainment will become more expensive too because we cannot reclaim VAT on the cost of entertaining their customers.

Therefore the cost of an away day with customers, or that corporate entertaining you’ve been thinking about will increase by 7.5% in October.

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