Not So Fine Dining: UK restaurants grappling with life post lockdown despite government supports

July 27, 2020

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3 min read

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What's going on here?

UK restaurants are facing a difficult choice in whether to pass on the VAT cut, whilst no-shows are exacerbating the financial health of the sector.

What does this mean?

July marks the reopening of the hospitality sector, as pressure increased from hospitality companies and businesses suffering from the coronavirus lockdown. A VAT cut from 20% to 5% on hospitality and tourism was introduced by chancellor Rishi Sunak to aid the sector, meaning restaurants, hotels and attractions will all have to pay less tax to the Government on their sales of certain items.  The cut lasts until 12 January 2021. The sector’s reopening is subject to compliance with the government’s rigorous social-distancing rules. These rules impose a restriction on the number of customers that can be served and require tables to be spaced at least two metres apart. However, reopening has not been as seamless as hoped for restaurants in the UK, as a rising number of customers have failed to turn up or cancelled after booking. This practice of “no-shows” can lose restaurants up to thousands of pounds in some circumstances.  On the other hand, many restaurants have decided to withhold part of or the whole of the VAT cut instead of passing on all the chancellor’s 15% point VAT cut to customers. These restaurants argue that by not passing on the VAT discount, they can use that saving to keep their staff on and stay afloat.

What's the big picture effect?

On top of the VAT cut, chancellor Rishi Sunak also introduced a discount voucher scheme tailored for UK restaurants in an effort to encourage people to eat out. The special treatments are vital in a sector that employs more than 2m workers, and approximately 3.2m people once its supply chains are taken into account. However, neither the VAT cut or voucher scheme cover alcoholic drinks, posing a further threat to pubs and bars.

It is still too early to assess the effectiveness of these measures, but it is unlikely that the sector’s health will ever recover to the level prior to the pandemic outbreak. Firstly, the social distancing rules will impede restaurants’ ability to maximise profits as they can only take in a limited number of diners at a time. Secondly, the hospitality sector ultimately relies on customers’ presence at bars and restaurants. As long as the virus is not eliminated, consumers’ fear will continually hinder people eating out. On a bright note, nonetheless, the pandemic is likely to spur more people to work from home, increasing support for local businesses and food delivery services.

The struggle of the hospitality sector will cause severe implications for UK landlords as they face loss of restaurant rental income. Various restaurant chains, including big names such as Restaurant Group, Pizza Express, and most recently, Ask and Zizzi, are poised to enter into insolvency or restructuring procedures. These companies are planning to close many of their sites and negotiate for a reduction in rental payments and restructure debt repayments for sums owed to landlords. The changes in UK insolvency law introducing a new moratorium can also prevent landlords from enforcing remedies for failure to pay rents under leasehold agreements, giving corporate tenants more time to restructure.

Despite the lockdown being lifted, it is very difficult for the restaurant industry to bounce back with the presence of the coronavirus still being felt across the sector. Further support from the government will be needed to help a sector that has previously generated a significant number of jobs.

Report written by Long Dinh

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