December 2014

A Taxing Issue

Cutting VAT on out-of-home dining would be a poorly-targeted piece of special pleading

WHILE YOU may not always agree with him, Wetherspoon’s chairman Tim Martin has to be applauded for being prepared, unlike many of his counterparts, to speak out on the issues facing the brewing and pub industry. However, one campaign on which to my mind he is very wide of the mark is that for a lower rate of VAT to apply to food sales in the hospitality trade. It is claimed that is would give a major boost to employment, but, taking a wider view, is it really such a good idea?

The issue is portrayed by its supporters as some kind of unjustified subsidy to supermarkets, whereas in fact a zero rate of VAT has always applied to most food sold in shops, whether supermarkets or local traders, and few people would argue that it should be taxed. Fifty years ago, the vast majority of alcohol sales were in the on-trade, but since then the off-trade has steadily gained ground despite not enjoying any advantage in tax and duty. In contrast, out-of-home dining has mushroomed. It’s possible to argue that, for most alcohol purchases, there’s a realistic choice between the two, but the same is never going to apply to food.

It’s also not comparing like with like. Even if food bought in a shop is zero-rated, to actually eat it you need to take it home, store it (maybe in the fridge), cook it using gas or electricity, provide tables, chairs, plates and cutlery to eat it, and heating and lighting for your room, all of which may be subject to VAT, whereas these things are included in the price of a meal served up in a pub.

It’s hard to argue that out-of-home food is too dear anyway – indeed you hear some people claiming that it is too cheap. There’s a wide variety of food available at all kinds of price points, and would reducing the price of a £9.99 Beef Stroganoff to £8.75 really prove a decision-breaker for many people?

It wouldn’t only be pubs that benefited, either. The hospitality trade encompasses all kinds of cafés, takeaways and restaurants too, so it would be giving a financial boost to your local kebab shop and burger joint as well as, if not more, than pubs. “Unfair tax treatment for McDonald’s” doesn’t somehow sound quite as appealing. It would also be helping the bottom line of three-star restaurants. The well-off tend to eat out more than the poor, and spend a lot more each time, so they would gain the greatest benefit. By definition, the more costly a meal, the higher the VAT element. And, when many food campaigners are complaining that people are less and less often preparing meals from scratch, surely cutting the cost of prepared meals would make them even less likely to cook at home.

It’s always a subject of political debate as to whether it is better overall to reduce taxes or increase government expenditure. The proposed VAT cut from 20% to 5% on out-of-home eating would undoubtedly be expensive, and, even assuming it is affordable, it’s not difficult to come up with areas where a tax cut might be more widely beneficial. Two obvious examples are a smaller reduction in the general rate of VAT, and increasing the income tax threshold. And, if encouraging employment is the main objective, then that would be better addressed by either increasing the threshold or reducing the rate of employers’ National Insurance contributions.

The conclusion must be that this is a superficially appealing but poorly thought out idea that is a classic example of special pleading, wanting tax favours for businesses you happen to think are deserving. Even if money was available for tax cuts, it would be better spent elsewhere.