VAT Cut for Hospitality: What Could the Autumn Budget Mean?

The Government has already introduced a temporary 5% VAT rate for certain children’s meals, children’s tickets and family attractions. The measure began on 25 June 2026 and ends on 1 September.

While this provides some targeted support, the Autumn Budget presents an opportunity to consider a wider reform of VAT for the hospitality sector.

A significant gap in VAT treatment

One of the central issues is the difference between buying food for consumption at home and buying food from a restaurant, pub or café.

Many food items purchased from supermarkets for home consumption are zero-rated for VAT, while food eaten in hospitality venues is generally subject to the 20% standard rate.

Julie Park, Partner and Head of Indirect Tax, said:

Under the current rules, many food items bought from a supermarket for home consumption are zero-rated for VAT. By contrast, food eaten in a restaurant, pub or café is subject to VAT at 20%. Pubs, cafés and restaurants are already facing higher wage bills, food costs, energy costs, rent and business rates, while also having to compete with supermarkets and convenience retailers whose cold food sales are often zero-rated for VAT

For businesses operating on tight margins, this difference can be significant. A £12 restaurant meal includes £2 of VAT, leaving the operator to cover ingredients, wages, premises and other costs from the remaining amount.

The impact is not necessarily as straightforward as a 20% tax rate being passed directly to customers. Businesses may absorb some of the cost through lower margins, while others may increase prices, reduce staffing or reconsider investment.

Hospitality is facing pressure from several directions

Hospitality businesses are contending with higher employment costs, food and energy prices, rents and business rates. These pressures are particularly important for smaller operators, which make up a large proportion of the sector.

The VAT difference is not always visible to consumers, but it has a direct impact on hospitality businesses. For a standard-rated £12 restaurant meal, £2 of the price is VAT before the operator has paid for ingredients, wages, rent, energy, insurance or other costs. The issue is particularly acute because the hospitality sector is made up overwhelmingly of small businesses, many of which are labour-intensive, locally based and already operating on tight margins.

A VAT reduction would therefore need to be considered alongside the wider tax and regulatory environment facing hospitality. Simply reducing VAT may provide relief, but its longer-term effect will depend on how much of the saving is passed to customers and how much is retained by businesses to support wages, investment and profitability.

Could VAT affect the UK’s tourism competitiveness?

The VAT issue affects the UK’s competitiveness as an international visitor destination. Many European countries apply lower VAT rates to parts of their hospitality and tourism sectors. In popular visitor markets such as France, Spain and Italy, restaurant, café and hotel services have often benefited from reduced rates below the UK’s 20% standard rate.

This creates a wider policy question. If the Government wants to encourage inbound tourism and support the visitor economy, should the tax treatment of hospitality be considered as part of that strategy?

Tourists support far more than hotels and restaurants. They support theatres, museums, shops, transport providers, local suppliers and jobs across the wider visitor economy. If the UK wants to grow inbound tourism, the VAT treatment of hospitality should be part of that conversation.

What could a VAT cut look like?

A broader VAT reduction would come with a substantial cost to the Exchequer, meaning the Government would need to weigh the economic benefits against the lost tax revenue.

There are also practical questions around how any reform would work. A reduced rate could apply to particular hospitality services, be introduced temporarily or be targeted at areas where the economic benefit is greatest.

The experience of the pandemic is relevant. The Government temporarily reduced VAT to 5% for hospitality, holiday accommodation and attractions, before introducing a transitional 12.5% rate and returning to 20% in April 2022.

Julie concluded:

The hospitality and tourism sector has campaigned for a lower VAT rate for many years. During the Covid-19 pandemic, the Government introduced a temporary 5% VAT rate for hospitality, holiday accommodation and attractions, followed by a transitional 12.5% rate before the standard 20% rate returned in April 2022

The debate, therefore, is not simply about whether hospitality should pay less VAT. It is about whether a different tax treatment could support business viability, consumer spending, employment and the UK’s wider visitor economy sufficiently to justify the fiscal cost.

What should businesses and individuals consider?

Hospitality businesses should watch the Autumn Budget closely for any changes to VAT rates, thresholds or sector-specific measures.

Operators should also model the potential impact of a VAT reduction on pricing, margins and investment, rather than assuming that a lower rate would automatically translate into higher profits.

For individuals, any reduction could potentially feed through into lower prices, although the extent would depend on how businesses choose to use the benefit.

More broadly, the Budget could signal how the Government intends to balance support for high streets, tourism and small businesses against the need to raise revenue.

For hospitality businesses, understanding the potential scenarios now will help them respond quickly if VAT reform is announced.

How Blick Rothenberg can help

If you would like to discuss this in more detail, contact your usual Blick Rothenberg contact or Julie using the form below.