Value added tax, or VAT is a tax that vendors like restaurants pay on sales at a rate of 20 percent in normal times. Chancellor Rishi Sunak introduced a U.K. VAT cut to 5 percent on food as part of coronavirus support for businesses in July last year — a reduction which is scheduled to expire on 31 March this year. With that date approaching, lobby groups are pushing for the VAT reduction to be extended into 2021 and beyond, while the government appears to be holding off on making its own decision on when the VAT cut will end until the Budget statement, which is due to be delivered by Rishi Sunak on 3 March.
Eater spoke to three restaurant owners: one with a portfolio of restaurants, including a clutch of Michelin-starred venues across the city; another who opened their first only two months before Christmas; and one with two sites and a delivery arm that has operated, in central London for the last decade, about the impact of a tax cut that most diners would rarely think about. VAT is built into the cost of dishes, even though it appears as a footnote on almost every restaurant bill.
When asked about the importance of the savings from the VAT reduction, their testimony was stark. More significant than any grant, loan, or payment deferral, VAT is a “saving”, yes, but for restaurants generating revenue, it quickly becomes cash it can count.
What diners normally see as one little line on a bill can add up to the difference between saving jobs, or even an entire business.
Here’s what the restaurateurs had to say.
What the VAT reduction is worth: £37,000
Adejoké ‘Joké’ Bakare opened her debut London restaurant Chishuru in Brixton Market in September last year. “Our situation is quite peculiar,” Bakare said. “We didn’t trade for a long time [before the second and third lockdowns]... but based on our projections the VAT bill would be £50,000 for the year.”
Because the restaurant was trading only for two months before the shutdown in December, Bakare calculated the restaurant saved a little more £2,000 on VAT.
While the restaurant’s original arrangement with the landlord means no rent is due until March (the end of six-month rent-free period), the unit — inside the market — is liable to pay an annual £10,000 service charge, so all savings make a difference. Bakare had been due to sit down with the landlord in December to negotiate future terms, given the restaurant will have been closed for probably half of the rent-free period. That did not happen because of the arrival of tier four restrictions before Christmas. Bakare hopes that the restaurant will still be around to have benefited from any savings it might have made during the short time it’s been open (and closed.)
Co-owner and co-founder Koya
What the VAT reduction is worth: £300,000.
“It’s a huge number,” John Devitt, co-owner of Japanese udon noodle restaurant Koya Bar, said of the VAT-cut saving. In normal times, he said, his company would pay £100,000 per quarter in VAT, or £400,000 annually. “The £75,000 saving [per quarter] is helping us stay afloat.” He added that the saving was especially important at a time when he could not envision returning to a level of trade where the quarterly VAT bill would come close to £100,000. “The bounce-back won’t happen until next year,” Devitt predicted.
Devitt believed that any savings that could be made now were critical, because his fear for the industry was that when reopening could take place, the support taps — the VAT cut being one of those — would be turned off and all the costs that had been hold for the last year would be turned back on. In that scenario, he said, “It’s all going to start getting ugly.”
Devitt, based on conversations he’s had with peers in the industry, feared that the government would not implement an extension to the reduced rate for VAT.
Chief executive JKS Restaurants
What the VAT reduction is worth: £3.7 million
“For us, JKS, the combination of VAT and rates, we save £5 million,” Jyotin Sethi, chief executive of the restaurant group which owns Gymkhana, Trishna, and Brigadiers; and which invests in, among others, Lyle’s, Sabor, and Kitchen Table.
The total annual saving for JKS’ restaurant group on its VAT bill based on the reduced rate equals between £3.6 and £3.7 million, Sethi said. The remaining saving of between £1.3 and £1.4 million was made through the saving on business rates, which is calculated at approximately half of the cost of rent.
Sethi said he was not expecting the confirmation of any extended reduction to take place until the Budget statement on 3 March but said he hoped to get some indication before then because it was “difficult to plan.”
Sethi pointed out that the savings made on the likes of VAT were critical less as a means through which businesses could make money through the pandemic, but as a safety net for survival through a lean trading period (through the COVID-19 crisis JKS had traded at 35 percent of their pre-Covid level) when debts were accruing. He said it was being used to reinvest in the businesses and help make new revenue streams more viable and to keep workers in employment. “It supports the system,” he said. That being said, Sethi and JKS are preparing for the VAT cut extension not to happen.