VAT on hospitality services was slashed from 20% to 5% last July to help pubs and restaurants recover from the pandemic. This reduction was initially intended to stay in place until January this year, but the measure was later extended to the spring and then to the autumn. The VAT rate for pubs will go up to 12.5% in September and then back up to 20% in March 2022.

As of 4 July 2021, 850 Wetherspoon pubs had reopened, out of a total of 860. Most of the closed pubs are at airports.

A trading update from JD Wetherspoon PLC said that the way VAT was levied was “unfair” and creates “economic distortions”, pointing out that supermarkets pay zero VAT on food, but pubs and restaurants pay 20% in normal circumstances. It said the VAT rise will “make the entire hospitality industry less competitive vis a vis powerful supermarkets.”

The statement pointed out that the top three quoted supermarkets (Tesco, Sainsbury’s and Morrisons) made pre-tax and pre-exceptional profits of £2.361bn in 2019. The top three pub companies (Mitchells and Butlers, Greene King and Wetherspoon) made £647m in the same year.

It said: “For many years, UK governments have therefore behaved like Monty Python’s Dennis Moore – who robbed the poor (in this case pubs and restaurants) to help the rich (supermarkets). Treating the same product – food – the same way for tax purposes makes economic sense.

“Apparent tax benefits to the Treasury, from higher taxes on food for the hospitality industry, are a chimera, since tax distortions cause lower growth. The main impact of tax inequality is on high streets and town and city centres, which heavily depend on a diversity of prosperous hospitality businesses for economic, social and employment success.”

What does the VAT hike mean for investors?

JD Wetherspoon expects to make a loss for the current financial year, ending on 25 July, with like-for-like sales from 17 May (when hospitality venues were able to reopen indoors) until 4 July, down 14.6% cent on 2019.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: ‘’JD Wetherspoon’s trading update has been greeted with very little cheer among investors with shares down around 0.5% in early trading. Although across the sector outside terraces are heaving and revellers are making the most of their new-found social freedoms, sales at the chains are still like a weak pint of beer.

“Far from being a cash cow, the Euros haven’t helped boost trade, with like for like sales down 20.8% between June 10th and July 4th, whereas just before the tournament they were down by 8.1%. The company may be ruing its decision only to televise a handful of matches as much of the football fan crowd has clearly gone elsewhere. It still expects to make a loss for the year to July 25th.

“The company is in need of the dose of tonic which Freedom day will present, given that punters will be able to pack in shoulder to shoulder once more. Its business model relies on filling its vast venues and selling large quantities of cheap alcohol and social distancing restrictions wreaked havoc with this.”