Catering sector seeks favourable tax break

The dilemma facing the UK government is how to remain steadfast to its policies for reducing the national deficit while doing as much as possible to protect employment.

Unemployment is now at a 17-year high (and will go on rising for a while yet), so the pressure is mounting to ease back on the fiscal brakes to generate jobs, especially among the young, where about one in five is out of work.

All eyes will be on the chancellor, George Osborne, next month when he delivers his autumn statement, which is effectively part two of the annual budget process.

Although it is unlikely that he will change many taxes overnight, it has become common practice to announce changes that will come into effect next April. Many hope he will act to soften the blow of his four-year austerity package, much of which is already having a noticeable impact on incomes and spending.

Osborne has already hinted that he regards January’s rise in the VAT rate to 20% as temporary and that before the next election he will reduce it across the board. Some, however, hope that he will be more flexible and vary the rate on specific services and products.

A report published last Thursday (13 October) by Oxford Economics, said that the 20% VAT rate is hitting tourism to Britain. The study estimated that hotels, restaurants and caterers directly employ 2.4 million people and contribute £34 billion a year in wages and profits to local economies.

But the British Hospitality Association, which commissioned the report, believes that a lower VAT rate on the accommodation and services provided to tourists could create 236,000 extra jobs by 2015 and then a further 239,000 by 2020.

The argument is that extra income tax revenue generated by the new jobs as well as the reduced unemployment benefit payable would replace the VAT the government would lose from cutting the rate on the industry. A lower rate would also deter fewer visitors from coming to Britain and thus boost corporate turnover and profitability and consequently the Treasury’s take from company taxes.

Will Osborne take the advice? He did not act on a similar plans put forward by the Federation of Small Businesses in the run up to the spring Budget, but there are precedents in Europe.

Both France and Ireland have slashed VAT on restaurant meals with some consequent success. This week Greek restaurateurs refused to implement a 10% rise in taxes on dining out, arguing that an increase would have a negative effect on their businesses and thus Athens’ all-too-fragile revenues.

But the problem with seeking favourable treatment for an industry, no matter how valid the underlying arguments, is that most sectors can put forward a compelling case.

Builders want special tax treatment to boost the provision of homes and national infrastructure; hauliers want fuel taxes to be more competitive with those in the EU; and Scotch producers are convinced that punitive taxes in the UK harm their exports because foreign governments use them to justify their own tariff barriers.

So the chancellor has to decide if some or any of the special pleas has compelling merit. And that’s another dilemma.