Chancellor Rishi Sunak has announced VAT cuts worth £4.5 billion as a lifeline for the struggling tourism and hospitality sector.

In his summer statement to MPs he also announced that VAT will be slashed from 20 per cent to 5 per cent until January.

Sunak announced the measures in a bid to get two of the sectors hardest hit by the pandemic, saying he wanted to see pubs, restaurants, cafes and B&Bs “bustling again.”

The cuts will apply to food, attractions and accommodation for the next six months.

Other measures announced include a £2 billion youth job creation scheme, with the government paying young people’s wages in new job placements for six months. The government will also offer businesses a £1,000 bonus to give work experience placements.

There will be a doubling of the number of work coaches at Job Centres across and a cut in stamp duty to stimulate house sales, temporarily raising the threshold from £125,000 to £500,000 until March 31, 2021.

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A £2bn temporary job creation scheme for the under 25s, funding six-month job placements for an estimated 350,000. The package will include the government covering 100 per cent of the national minimum wage for each young employee, for 25 hours a week. Employers will also be able to provide wage top-ups.

Companies could also pocket a £1,000 bonus if they bring a furloughed worker back and keep them employed until January. Mr Sunak called the scheme a “jobs retention bonus”.

BUSINESS RECOVERY NOW RESTS ON HAVING ENGAGED AND MOTIVATED EMPLOYEES. THIS, IN TURN, WILL HELP IMPROVE THE LIVES OF EVERYONE

Colin Fitzgerald, Distribution Director at Legal & General welcomed the job creation initiatives. He said: “Business recovery now rests on having engaged and motivated employees. This, in turn, will help improve the lives of everyone in the UK: creating real jobs and a better infrastructure to help overcome the current economic catastrophe and come out the other side a more responsible and sustainable society.

“Structured training programmes will go a long way towards attracting the right candidates to the right job in the right company, and will no doubt prove particularly attractive to more cash-strapped SMEs.

“But it’s also important to remember that training and development should form part of a wider employee wellbeing programme: a programme built upon a clearly articulated purpose; with reward and benefits programme at its heart; designed and communicated in line with employee needs; and hardwired to business goals. The pandemic hasn’t changed any of this. What it has done – especially during lockdown – is made leaders realise the crucial importance of employee wellbeing to productivity and profitability.

“Employees now entering the workforce for the first time place a premium on how companies care for them. How employers respond to wellbeing issues like stress, burnout and uncertainty will be a hallmark of their attitude towards responsibility and sustainability. Yet while 61% of people trust their employer to look after their wellbeing, only 29% of HR leadership have a health and wellbeing strategy in place.¹

BUSINESSES ARE IN DESPERATE NEED OF A CLEAR ACTION PLAN. IT IS VITAL WE SEE THE HOSPITALITY INDUSTRY BACK UP AND RUNNING

“There’s a common misconception that that wellbeing programmes are too costly, especially for SMEs. But they’re only too costly where benefits are ill thought through and not communicated well.”

Commenting on the VAT reduction measures, Russell Nathan, senior partner at accountancy firm HW Fisher said: “Our restaurants, pubs, shops and hotels are struggling. This is a timely announcement from Government as businesses are in desperate need of a clear action plan. It is vital we see the hospitality industry back up and running, and these measures announced today will provide an essential lifeline for many UK businesses.

“A temporary reduction in the VAT rate and income tax for lower earners will boost consumer demand and raise consumption, but many businesses will fear the measures announced today aren’t enough. To have a lasting impact and bring back confidence, VAT should be reduced for the hospitality sector for a minimum of two years – January isn’t enough time to create long term certainty.”

Adam Prince, VP Product Management & Compliance, Sage, welcomed the VAT reduction, saying: “This move is sure to stimulate spending, which will assist much needed growth in the UK economy.” 

ANY CHANGE IN THE ECONOMY PROVIDES OPPORTUNITY IN THE PROPERTY MARKET AS THERE IS MOVEMENT

He added: “All businesses should work with their advisers and accountants to understand the changes needed, while ensuring that during this transition, business keep a close eye on their cashflow and adapt forecasts accordingly given the increased risk for incorrect VAT amounts to be accidently invoiced and paid.”

Sarah Gardener, Partner at Shaw Gibbs praised the rise in the Stamp Duty threshold, saying: “The reprieve for this tax on a large proportion of housing-stock in the UK will help keep the housing market moving and will bolster the confidence of those that are concerned about the impact that Coronavirus will continue to have on their financial wellbeing. 

“Any change in the economy provides opportunity in the property market as there is movement. Despite the huge shock the sector has suffered as a result of the suspension of trading during lockdown, these early weeks indicate that the residential property market is making a steady recovery. There is a quiet optimism amongst those in the profession and this announcement should only help to sustain the recovery further.”

Chirag Shah, CEO, Nucleus Commercial Finance, said of the VAT reduction: “The Government has a vital role to play in supporting SMEs across the country, and so it’s great to see the Chancellor build on the support packages already in place to help Britain’s businesses through the global pandemic.

“The hospitality and tourism sectors are crucial in providing jobs to millions of workers and contributing to national GDP. Today’s announcement of a VAT cut for these sectors will be welcome news to business owners, allowing them to reopen and providing them with much needed clarity and funding to navigate these uncertain waters.”

IT IS QUESTIONABLE WHETHER £1,000 BONUS IS STRONG ENOUGH TO ACT AS A CORPORATE MOTIVATOR TO KEEP STAFF

Alison Horner, indirect tax partner at MHA MacIntyre Hudson, says businesses need to prepare carefully as quick VAT cuts can cause an administrative tangle: “The emergency VAT cut is great news for travel and tourism but sudden VAT cuts always raise substantial administrative issues.

“Businesses must get on top of their preparation. In this case any premise serving alcohol will have to re-programme its tills to deal with three different VAT rates: one for alcohol at 20%, one for cold take-away food at 0% and 5% for everything else.

“In the past lack of preparation led to disaster. For example, the UK experimented with a VAT cut in response to the 2008 financial crisis which caused chaos for retailers. Some supermarkets were assured by HMRC that altering their prices would take only a few hours, but instead, they spent over a week in a crisis mode.”

Paul Falvey, tax partner at accountancy and business advisory firm BDO said: “The Kickstart placement scheme is an interesting way to re-think entry-level roles by subsidising work placements for those who are 16-24 in a very challenging jobs market. This new tack closely aligns to our recent survey, which showed that 72 per cent of respondents agreed that boosting businesses and jobs should be Mr Sunak’s spending priority.

“What will be particularly welcome is how focused Mr Sunak’s policies are – namely targeting individuals and business sectors most impacted by Covid-19. The “three phase” approach suggests that a full rethink is underway in order to help the UK emerge in a post-Covid landscape.”

Simon Michaels, CEO OF HW Fisher Business Solutions said: “The economic pain by businesses across the UK is being felt now and it is questionable whether £1,000 bonus is strong enough to act as a corporate motivator to keep staff.

“The contributions to be made by employers to furloughed staff will continue to increase over the coming months and therefore, cost conscious owner/managers are unlikely to be driven by a £1,000 incentive which is a lifetime away in this current economic climate. Even with this bonus, business owners will need to ensure their costs are controlled in the short-term and retaining ‘surplus’ staff for a retention bonus down the road will still be more costly.”

Andrew Harding, Chief Executive — Management Accounting, The Chartered Institute of Management Accountants, said:  “Measures such as additional funding for traineeships, money to fund apprenticeships and support for young job seekers via the Kickstart scheme will be essential to aid short-term recovery.

“However, this statement does not go far enough to tackle the long-term challenges faced by the UK economy, which this crisis has only exacerbated (e.g. low productivity, high dependency on low-skill service sector jobs, regional imbalance, and weak social mobility).

“We have missed our first opportunity to help our economy back on a sustainable, sound footing. For example, the VAT cut on food, accommodation and attractions will only encourage relatively limited business and consumer spending in the immediate term.

“The Government needs a strategy to go further than it is has today and lay the groundwork to drive the long-term economic recovery it promised. This should include giving businesses and investors certainty on the tax and regulatory frameworks over the next two years to support inward investments, directing skills training towards jobs and sectors with real-wage growth potential, and designing appropriate measures to support SMEs and new startups.

“Let’s hope the Chancellor doesn’t wait too long to address these challenges or we risk missing the boat to long-term economic recovery.”