Chancellor Rishi Sunak cut the VAT rate for businesses in the tourism and hospitality sectors in last week’s summer budget.

The aim is to reduce prices, save jobs and encourage people to spend.

However, consumers will only benefit if businesses decide to pass the discount on.

What is VAT?

VAT stands for value added tax. It’s paid by businesses to HMRC on the items or services they sell.

It’s normally passed on to consumers in the price they pay for these goods and services.

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Sunak has cut the VAT rate from 20% to 5% for businesses in the tourism and hospitality sectors to help them recover from lockdown.

The tax cut comes into effect today (15 July) and will remain in place until 12 January 2021.

Food and drink

Food and non-alcoholic drinks sold to eat or drink on the premises, for example in restaurants, cafés and pubs, should all be cheaper.

Hot takeaway food and hot takeaway non-alcoholic beverages, such as coffee, should also benefit from the cut.

Alcohol is not included in the VAT reduction but Wetherspoons said it will be reducing the price of a pint, as well as food and soft drinks.

The pub chain will offer a pint of Ruddles Bitter for £1.29 (down 50p), a pint of Doom Bar at £1.79 (down 31p), and guest beers at £1.99 (down 26p).

Lavazza coffee and tea will be reduced to £1.29 (down 16p), and soft drinks will be £1.69 for a 14oz glass of Diet Pepsi and £1.79 for standard Pepsi (down 11p).

Breakfasts will be reduced to £3.49 (down 41p), pizzas, including a soft drink will start from £5.49 (down 66p) and burgers and a soft drink will start from £4.99 (down 66p).

Hotels and tourist attractions

Accommodation such as hotel rooms, and pitch fees for caravans and tents are all included in the rate cut.

Tourists could also see reduced prices at fairs, amusement parks, museums, and cinemas.

Theatres and concerts will also theoretically benefit from the rate cut – once they are back up and running.

Will the tax cut be passed on to consumers?

But despite the promise of cheaper prices, it’s up to the businesses concerned as to whether they pass on the tax cut.

Many companies will use the windfall to shore up finances hit by the lockdown, rather than cut prices.

For example, The National Gallery has said that tickets to its paid-for exhibition of the works of Titian would not fall in price following the tax cut as it would be using the cash to repair it finances following lockdown.

Starbucks and McDonald’s have promised to pass on the reductions at company-owned stores – but where stores are franchised, it would be up to the franchisee.

Best Western hotels said it would be reducing the price of rooms and food in line with the cut on future bookings but anyone who had already booked a room will be subject to the old rate of 20%.

Genevieve Morris, head of corporate tax at accountancy firm Blick Rothenberg, said: “The indication from the chancellor’s statement is that he expects this to reduce prices and encourage spending.

“But many businesses that have huge losses over the past few months may use this to boost profits, by keeping headline consumer prices the same, and pocketing the VAT saving – and who can blame them if they did?”