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Chapter 1: Why is cutting VAT for pubs and restaurants considered a bad idea?
10 billion pounds.
That is an awful lot of money.
Sorry, 10 billion pounds just for restaurants and hospitality.
Good God. VAT is a really big tax. Hospitality is a pretty large, large part of the economy.
You know, people like Andy Burnham talking about what he would do if he came into power, cutting business rates for pubs. And those in the hospitality sector saying that they want a cut on VAT for pubs and restaurants to 10%.
It's a terrible idea. And out of all the things we could do with £10 billion, which is what it would cost, this is one of the worst.
So talk us through why the likes of Tom Kerridge are wrong that cutting VAT would be the right thing to do.
We're delighted to say that this year the rest is money is powered by Octopus Energy. So we're joined by its founder and CEO, Greg Jackson. Hiya, Greg. You travelled with Prime Minister Keir Starmer on his latest trip to China.
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Chapter 2: What are the implications of a flat VAT rate on all goods and services?
Why?
There's a lot of people who quite rightly think we're naive if we don't understand the threats we face from China. But it's equally naive not to understand that Chinese technologies... can now transform so many industries. And if we don't understand what they're doing and find ways to work with them, we're going to get left behind.
Look, the reality is it used to be about China stealing our secrets, but now their own investment in technologies means that solar panels are 400 times cheaper than they were 40 years ago. Batteries for electric cars are 10 times cheaper than they were 12 years ago. If we can find ways to work with this, we can bring costs down for British people, and that's got to be a good thing.
Greg, thank you very much. Now on with today's episode.
Hello and welcome to The Rest Is Money with me, Robert Paston.
And me, Steph McGovern. And back with us is Dan Needle from Tax Policy Associates. Now, Dan, obviously a friend of the show. We love getting him on because he knows absolutely everything there is to know when it comes to tax.
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Chapter 3: How do business rates impact landlords versus small businesses?
And it is really in the news at the minute. We've got chefs calling for cutting VAT for pubs and restaurants to 10%. And we've got Andy Burnham out talking about tax, haven't we, Robert, too?
We have. Vandy Burnham in Makerfield trying to be their MP, also trying to be our next prime minister. And one of the policies that he hopes will make him more popular is he says he wants to help pubs by cutting the council tax they pay. So does that make any sense at all? How should we help struggling smaller businesses?
So here's our conversation with a guy who knows everything about that kind of thing, Dan Needle.
Dan, good to have you back. We want to jump straight into talking about the kind of the noise around VAT at the moment and the pressure that's putting on businesses, along with, you know, obviously there's the national insurance contributions going up for employers. There's the In fact, minimum wage has gone up. There's lots of talk around business rates as well.
So lots of businesses are really feeling the pressure and we're hearing chefs and those in the hospitality sector saying that they want a cut for VAT on VAT for pubs and restaurants to 10%.
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Chapter 4: What evidence exists against the effectiveness of VAT cuts in benefiting consumers?
So first of all, what do you think about this? Is that something that you think, Dan, would make a difference, this rate cut to the hospitality sector? And, you know, would it be fair, I guess?
It's a terrible idea. It's a really bad idea. And out of all the things we could do with £10 billion, which is what it would cost, this is one of the worst.
So talk us through why the likes of Tom Kerridge are wrong that cutting VAT would be the right thing to do.
There are so many reasons this is a bad idea. It's quite hard for me to get them out coherently, but I have a go. The first thing is the cost. £10 billion. That is an awful lot of money.
Hang on. Sorry, £10 billion just for restaurants and hospitality? That's the cost of that?
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Chapter 5: Why is maintaining inefficiencies in businesses a concern?
Yes, £10 billion. That's a lot of money. And if you were the Chancellor and a magic pixie appeared and gave you £10 billion, would you use it for this? I think you probably wouldn't. It's... The benefit of it, who gets it? So whenever you have a VAT cut in one service, the evidence suggests that it's the producer who gets it, not the consumer.
When VAT was abolished on e-books, that followed a long campaign by the publishing industry who promised it would reduce prices. It didn't. We couldn't see any change in prices at all. All the benefit went to people selling e-books. Same would happen here. So, yes, that would help small, struggling family restaurants that are currently having difficulty. But most of the money wouldn't go there.
Most of it would go to the really big guys, chain restaurants, large hotels.
Chapter 6: How do VAT and business rates affect the hospitality sector specifically?
Why are we giving money to the rich?
So basically what you're saying is this price cut, which is essentially what they're arguing for, wouldn't actually be a price cut for consumers. It would just be a profit gain in terms of an increase in margins for the actual restauranteurs. I mean, I think that's intuitive.
If you go to the man or woman in the street and say, hey, we're going to cut VAT on a product. Do you think the person selling the product is going to pass on that benefit or are they going to keep it to themselves? I think most people's intuition would be, well, of course, they'll keep it to themselves. And the evidence across Europe studying over 100 VAT cuts has shown that's what happens.
But these are restaurants that are struggling, a lot of them. So how would you then, surely they'll want to bring down their prices in order to get more people through the doors. And then in the longer term, that's tax, potential tax revenues going up because they'll be making more profit and more people will be coming into the business.
You might think so, but the evidence suggests that in the main, in fact, almost entirely, that doesn't happen, that the difference is kept as additional profit.
So can I just, though, make the counter argument that some would make? which is that many of these businesses are either going bust or are quite close to going bust. And rebuilding their margins would keep them alive, would preserve employment, and potentially would increase jobs.
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Chapter 7: What alternatives exist to support struggling small businesses?
This is, again, obviously an argument that you don't find compelling.
Well, it's a very inefficient way to do it. If you wanted something targeted at struggling small businesses, you could think about ways of doing that rather than a 10 billion VAT cut, most of which will not be going to those guys, but will go to large chains.
Can I just ask you another question which has gained quite a lot of attention, which is, does it matter – that the costs on British restaurants, and in particular from VAT, are significantly higher than in other countries. Because it is the case. I mean, I have actually sort of double-checked that this is the case. The indirect cost of VAT in this country is, in some cases, double VAT.
the equivalent tax on other European countries and indeed in America. You take the view that that doesn't matter.
Well, I take the opposite view, which is that it's a bad feature of VAT systems to tax different things differently. And when people laugh at disputes over Jaffa Cakes, disputes over whether rotisserie chicken is taxed or not, it's because we have a complicated VAT system which taxes lots of things differently.
We're much better off having a simpler system with a lower rate of VAT that applies to everything. And there are countries like Denmark, like New Zealand that do that. We should be copying them, not countries like France that have a whole bunch of special deals to suit special interests, including, yes, hospitality.
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Chapter 8: How can we ensure a level playing field for all businesses?
So if you look then at those countries you mentioned where they do have this kind of flat rate VAT across all products and all services and things, what's their income from it then? Do the governments of these countries actually make a decent revenue from it then?
Yeah, I mean, the total amount of GDP raised from VAT varies, but the base, the stuff which is taxed, is just as important as the rate. In this country, we have a kind of average rate at 20%, but our base is incredibly narrow, one of the narrowest in the world. We're much better off having a lower rate. and a wider base, none of which is going to help restaurants.
But the problem with restaurants isn't VAT. VAT has always, well, for a very long time, been the same rate. That's not causing the problem. We need to look at what the problems are and solve those problems rather than reaching the VAT as some kind of cure or solution, because it's a really bad solution for problems caused by other things.
And just to be clear, if we had the broadest base... So we would include food we buy in shops, for example. We might include children's clothes. We might include actual books, as it were. That, you think, would lead to a much more competitive economy. sort of industries all round?
It would be simpler for everybody. It would be much cheaper for businesses to apply. It would be cheaper for government to collect. Children's clothes, for example. If you look on the Harrods website, you will find an £8,000 girl's gold jacket. That is free from VAT, thanks to... Us. That is not a sensible use of other sources.
Much better would be to abolish the VAT exemption for children's clothes, use some of the savings to increase child benefits that the average family is not worse off, and book the savings to slightly reduce the rate. Now, children's clothes are a fairly small element. Food, much bigger element. But again, what we should be doing is we should be equalising the rate with everything else.
We should be dropping the rate and we should be protecting people on lower incomes so they don't lose out. Because most of the benefit from the VAT zero rate on food doesn't go to the poor. Most goes to people spending a lot on food. And that's people who are richer.
I think you also believe in something that's going to upset people in food trucks who actually, some of them may not cross the VAT threshold. threshold, you think the VAT threshold should be reduced very significantly as well, don't you? So that more businesses pay VAT.
There is a big problem with VAT and its effect on business, which is that if you do a chart of the number of businesses for each size of business, each amount of turnover the businesses do. What you'd expect to find is lots of tiny businesses and then fewer and fewer numbers, nice smooth curve to get to a small number of very large businesses. That's what you'd expect.
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