£4 billion food, drink and hospitality VAT cuts come in but not all companies will pass them on

Two men enjoy a cooked breakfast
It is hoped the tax cuts will boost the economy and get people spending. Credit: PA

VAT cuts worth £4.1 billion have come in to force, allowing companies in the food, drink and hospitality sectors to slash prices for customers - but not all of them say they will.

The government has cut VAT from 20% to 5% from July 15 until January 12 in a bid to get customers back in to restaurants, cafes and pubs, and using the hospitality sector again, as part of its plans to kick-start the economy following the slump caused by coronavirus.

VAT - Value Added Tax - is paid on multiple everyday goods and services, but the tax is usually included in price most consumers see.

The Treasury estimates households could save £160 a year on average, but not all firms may pass on the benefit.

Speaking when he introduced the tax cut as part of his summer "mini-budget" Chancellor Rishi Sunak called the scheme "a £4 billion catalyst for the hospitality and tourism sectors, benefiting over 150,000 businesses, and consumers everywhere – all helping to protect 2.4 million jobs".

How much could you save?

  • For a meal costing £45 without alcohol, a couple could expect to save £5.62

  • A £55 one-night stay at a hotel in a family room would see a saving of just over £6.80

  • A family ticket to a theme park or zoo costing £144 could see a saving of nearly £18

The VAT cut does not apply to cold takeaway food, such as sandwiches or salads. Alcohol is also exempt, but pub chain Wetherspoon says it will use the money it saves on food and cold drinks to help fund lower prices on some of its most popular beers.

Wetherspoon said it will pass cuts on to customers. Credit: PA

The chain, which has 867 pubs, has also produced posters praising the chancellor as a "legend" after the decision to cut VAT.

The move has been fiercely criticised, however, by beer industry leaders who said it is "misleading".

A joint statement by Tom Stainer, chief executive of the Campaign for Real Ale (Camra), and James Calder, chief executive of the Society for Independent Brewers (Siba), said:

"Like all pubs, Wetherspoon will not be able to benefit from a VAT reduction on beer sales and it is disappointing to see them potentially mislead customers into believing cheaper beer prices are as a direct result of the Chancellor’s measures."

Cafe chain Pret a Manger has said the move will cut the price of a takeaway Latte to £2.40. Credit: PA

McDonald's, KFC, Starbucks, Nando's and Pret A Manger are some of the big names which will pass price cuts on to customers.

Pret A Manger said the price of its coffee will be cut from Wednesday, with the price of hot food to be cut from Friday. The high street chain said the price of a takeaway latte will fall 35p to £2.40 as a result of the tax break.

McDonald's said it is recommending a cut in the price of popular items on its menu and meal deals to its franchisees. It said it intends to reduce the price of Happy Meals by 30p and breakfast meals by 50p, with price cuts also recommended for Big Macs, Quarter Pounders and McNuggets.

Cars queue at a KFC drive-thru, the company says customers will benefit from the VAT cut. Credit: PA

Rival KFC said it will reduce the price of sharing buckets by £1 and slash the cost of certain "fan favourites" by 50p.

Restaurant chain Nando's said it will pass on "100% of the benefits" from the tax break to its customers, helping to reduce the price of a quarter chicken by 55p.

Many smaller companies say they will not pass the price cuts on to customers, however, but will use the money saved to try and patch up their finances which have been seriously dented by the Covid-19 lockdown.

While many hotels, pubs, restaurants and cafes are operating at a reduced capacity due to social distancing rules, and say they cannot afford to pass the savings on.

What food and drink will be included in the VAT cuts?

  • Food and non-alcoholic beverages sold for on-premises consumption, for example, in restaurants, cafés and pubs

  • Hot takeaway food and hot takeaway non-alcoholic beverages

  • Sleeping accommodation in hotels or similar establishments, holiday accommodation, pitch fees for caravans and tents, and associated facilities.

What else is covered?

  • Theatres

  • Circuses

  • Fairs

  • Amusement parks

  • Concerts

  • Museums

  • Zoos

  • Cinemas

  • Exhibitions

  • Similar cultural events and facilities

Speaking to the BBC, Malcolm Bell, Chief Executive of Visit Britain, said the chancellor's move was to support business, not help holidaymakers.

He said some firms had reported tourists calling them to ask for 15% off their holiday booking.

"My message to customers is this is to help the businesses, not to reduce the cost of their holiday.

"It is only a temporary relaxation up to January," he said.

Hot drinks will be covered by the tax cut. Credit: PA

While Bernard Donoghue, Director of the Association of Leading Visitor Attractions (Alva), told the organisation he expects the VAT cut will go towards helping venues "repair their finances as opposed to being passed on to customers".

Also on Wednesday, the health secretary denied Mr Sunak is looking to raise capital gains tax (CGT) - a tax applied on profits on homes and other assets.

Matt Hancock was speaking to Sky News after being question after The Treasury commissioned a review of CGT and the chancellor looks to find a way of paying back the billions of pounds borrowed to support the economy through the Covid-19 crisis.

Mr Sunak has asked the Office for Tax Simplification (OTS) to look at how CGT is currently applied.

“We’ve just had the summer economic statement and apparently reviews like this are normal all of the time and not connected to any decision one way or the other," Mr Hancock said.

Camping and accommodation will be covered by the tax cut. Credit: PA

The review comes after the Office for Budget Responsibility said government measures to address the impact of the virus would result in an “unprecedented peacetime rise in borrowing” this year, escalating to between 13% and 21% of GDP and reaching up to £322 billion.

The fiscal watchdog also warned that the UK economy might not recover from the pandemic until 2024.