Ways to deal with the January VAT rise

When Chancellor George Osborne announced plans to raise VAT to 20% next year in the emergency Budget in June, the British Beer & Pub Association said it was the "price to pay for tackling the deficit".

But with just weeks until the tax hike takes effect, on 4 January 2011, such a sanguine view is clearly not shared by many in the hospitality industry.

For JD Wetherspoon chairman Tim Martin, the increase in VAT will "greatly exacerbate" the competitive disadvantage pubs and restaurants face versus supermarkets.

"Supermarkets pay no VAT on food and the cash VAT per pint or bottle of wine is much lower than pubs and restaurants because their prices are lower," he says. "In France they have redressed this balance by reducing VAT on food in bars and restaurants to 5% and the French government has lost no tax, owing to higher employment taxes, prices and more jobs in the catering sector. We badly need to follow suit or supermarkets will kill us with their tax advantage."

Nick Cash, owner of the Brickhouse restaurant and bar in east London, agrees that hospitality gets the rough end of the VAT stick. "We don't pay VAT on our food when purchased but, when sold, we have to charge, which we feel is unfair - it should remain consistent," he says. "Our industry is being unfairly hit and should be looked at as a separate group; especially the small independents like us."

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Chilango founders Eric Partaker (left) and Dan Houghton: adding value to keep customers

The complex VAT system hits restaurant operators because of the different rules that apply to take-away food, according to Eric Partaker, co-founder of fast-casual Mexican chain Chilango. "This VAT rise perpetuates the existing uneven playing field, because VAT doesn't apply to take-away sandwiches, which means that we have to add value in other ways to maintain current guest loyalty and generate new guest loyalty," he says. There are also fears that the VAT hike will damage the UK's tourism market. A TripAdvisor poll of 3,200 consumers across Europe showed that nearly a quarter (24%) felt the VAT rise would make travelling to Britain for a holiday too expensive. The research - which followed a Centre for Economics and Business Research study that predicted consumer spend would be £1.6b less in the 12 months after raising VAT to 20% - also revealed that 24% of Britons were concerned the VAT rise could make domestic holidays in 2011 too expensive. Beth Roberts, proprietor of Gwesty Cymru, a hotel and restaurant in Ceredigion, Wales, says the VAT rise will make it "a tough time for everybody" especially in light of the Government spending cuts announced in October's Comprehensive Spending Review. "January is a particularly quiet time for us following the wake of Christmas spending, and is the worst possible time for VAT to go up," she adds. "When VAT went back up to 17.5% last January, we absorbed the cost. This year we'll only be increasing prices so that the net value stays the same. In reality, however, we'll probably have to offer discounts on rooms in order to fill them, which will mean less income. It's a double-edged sword for us." Of course, for some operators the VAT rise will have minimal impact. Mark Haywood, marketing manager of the Town Hall Hotel in London's Bethnal Green, says: "Being a hotel located close to the financial district we have found that almost all of our guests claim their VAT back. The drop in 2009 to 15% had little effect on our other property's business and we have found that the 2011 increase to 20% is having equally as little an impact on advance bookings at both properties." The Town Hall Hotel will be freezing prices at more leisure-focused times of the week, such as weekends, to ensure non-business travellers keep coming through the doors. But absorbing the VAT increase simply is not an option for many operators, particularly in the restaurant sector, warns Martin Couchman, deputy chief executive at the British Hospitality Association. "Restaurants, with specific pricing of menu items, may need to impose the VAT increase to maintain margins," he says. "The only alternative is to cut costs. But costs have already been cut during the recession - how much further they can be cut is not clear. Portion sizes can also be adjusted but that might affect value." For Couchman, value remains the key, whether the VAT rise is absorbed or not. "In the final analysis, the customer will willingly pay for value - however he perceives it," he says. "Value is the sum of all parts - food, welcome, ambience, service and so on - the whole experience. Price is only one factor in the equation. The secret is to give great value for whatever price is charged. That's nothing new." NUDGE UP PRICES DISCREETLY Andy Spracklen, managing director, Ning restaurant and cookery school, Manchester "We regularly review our prices and prefer to nudge them up discreetly so that few customers notice, rather than announcing in some big way and apologising. Why apologise? If your food and service is excellent and continues to represent great value for a holistic and personable experience, then we have no apology to make and customers will continue to eat out at independents such as ours with a good, word-of-mouth reputation. "The VAT rise will, however, force us to rise sooner than later, but we plan to hold prices throughout January as a kind of January sale. We have already announced our cookery school prices will be held, but that's more because we believe that we have already reached a psychological threshold. "Having said all that, the jury is still out and it will be a pain in the butt from a cash-flow management point of view. We can't predict or force customer behaviour, but we can be nimble enough to adapt and respond accordingly through pricing, promotions and added-value experience." ![PASS ON THE RISE BUT ADD VALUE Beppo Buchanan-Smith, owner, Isle of Eriska Hotel, Spa and Island "The VAT rate increase, together with the current underlying inflationary costs and continuing economic uncertainty, has left us in very dubious times, with a general gamble being taken whatever we decide. "At Eriska we have raised our rates by 5% for 2011 so that is really a 2.5% inflation increase and the VAT increase. When the rate fell two years ago we passed this on to our customers so believe we need to pass any increase on, too. Given that we are closing in January for a major refurbishment of our bar area, we are able to start with fresh rates at the end of January and hope that both the improved facilities and general increase in VAT across the economy will make the increase acceptable." 10 TIPS TO KEEP CUSTOMERS COMING THROUGH THE DOORS 1 Focus on offering good value - of which price is just one factor. Others such as food, welcome, ambience and service are just as important. 2 Maintain, or even improve, standards - lowering quality will drive customers away. 3 Offer set menus or fixed-price deals to show value for money. 4 Use special offers during quieter periods to drive business. 5 Use social media as part of your marketing mix to raise awareness of the business and its special offers. 6 Create comprehensive packages, with special elements such as transfers from the airport, walking tours or theatre tickets, to add to the customer experience. 7 Constantly ask for feedback from your customers. All the major chains make a significant investment in this area and smaller operators should follow suit. 8 Continue to look after your existing customer base - this is much easier than attracting new clientele. 9 Ensure staff training is tightly focused on customer service skills and improving hospitality as first impressions are more important than ever. 10 Measure the value of your business decisions - if you can't measure it, don't do it. STOCK UP BEFORE THE RISE Richard Morley, director of Business Cash Advance, which advances funds throughout the hospitality sector, says the timing of the VAT rise is not perfect, but the blow can be softened by canny purchasing. "If hospitality operators can buy stock in advance, before the VAT rise, they may be able to negotiate a discount on that stock then pass that saving on to customers. Everyone loves a bargain," he adds. "A different route, which can be just as effective, is to go the other way and turn your establishment into the kind of place customers really want to visit. So instead of embracing austerity with cut-price meals and deals, traders could refurbish as much as they can afford to so making their premises feel luxurious. One thing people need in a downturn is escapism." HOW TO COMMUNICATE VAT-RELATED PRICE RISES TO CUSTOMERSBe clear about the reason for the price rises Where you are increasing prices, make it absolutely clear that it is a result of the VAT increase and no more. This avoids the immediate and natural reaction that you are profiteering, says Richard Slade, owner of Battlesteads, a hotel, pub and restaurant in Northumberland. Tie in price rises with adding value Put the prices up as little as possible, but provide added value by including an extra item within the price, Slade says. Implement price rises before Christmas Most of the major chain restaurants have already done this, so independents should follow suit, according to Peter Martin, founder of hospitality market analyst Peach Factory. With price increases already in place, operators can they say they have "frozen" prices in January, he says. Communicate policy on deposits clearly Where a deposit is received before 4 January 2011, but the full supply takes place after this date - for example, a stay in a hotel - the business has a free choice as to whether to apply a VAT rate of 17.5% or 20% to the deposit. For purposes of goodwill, you should ensure you choose a policy and stick to it, and make your customers sufficiently aware of this, advises Shirley Smith, partner at business advisory firm Reeves.