VAT cut to 5% for hotels and restaurants – but will you get a discount?

VAT stands for value added tax – a tax which is charged on many goods and services – though it's normally included in the price you see as a consumer. The standard rate of VAT in the UK is 20%, though some items are charged at a reduced rate of 5% (and some items, such as most supermarket food and newspapers, are exempt from VAT).

From today (Wednesday 15 July) until 12 January 2021, the VAT rate for hospitality and tourism businesses has been slashed from 20% to 5%, meaning restaurants, hotels and attractions will all have to pay less tax to the Government on their sales of certain items. The reduction, which is expected to cost the Government £4.1 billion in tax, is intended to boost the part of the economy hit hardest by coronavirus.

The VAT rate cut means firms can cut prices for customers, with the Government giving examples of potential savings of £12.50 per night on a £100 hotel room, or a discount of £2.12 on a £16.99 takeaway pizza.

But firms AREN'T obliged to pass on the VAT cut to customers by dropping their prices. The Treasury says that while it looks to businesses to pass on the benefit of the VAT drop to their customers if they can, it is for individual companies to decide their own prices – and many affected firms will have missed out on recent income due to being closed during lockdown.

See our Coronavirus Travel Rights and Life-in-Lockdown guides for more info.

What has VAT been cut on?

The reduced 5% VAT rate applies in the following areas:

• Food and non-alcoholic drinks which are sold to eat on the premises of places such as restaurants, cafés and pubs, as well as hot takeaway food and non-alcoholic drinks.

• Holiday sleeping accommodation, including hotels and pitch fees for caravans and tents.

• Admission to some attractions, such as theatres, zoos, amusement parks, cinemas, museums and more.

Are firms passing on the cut?

Though it's up to individual firms to decide whether to pass on the cut by reducing prices, some have already said they'll drop prices as a result.

For example, Pret A Manger has said customers will see price reductions on coffees from today and on hot food on Friday 17 July, while Nando's has promised to pass on "100% of the benefits" of the VAT reduction to customers.

However, even where companies have pledged to drop prices, that doesn't necessarily mean they're reducing the price of all products, or that the VAT cut is being passed on in full.

For example, McDonald's has announced a series of price reductions on its meal bundles and "McDonald's classics", but not every menu item is included and the actual discount varies (it's also worth noting that as it's a franchise business, these are technically only recommendations – actual prices could vary and the price cuts won't necessarily be implemented in every outlet).

While it's cut the price of Happy Meals, breakfast meals and items like the Sausage & Egg McMuffin roughly in line with the VAT cut, other items are only being partially reduced – for instance, its standard Big Mac price is dropping from £3.39 to £3.19, a cut of 20p rather than about 42p which would reflect the full VAT cut. On the other hand, some other price cuts go above and beyond – for example, a regular black coffee is dropping by 40p from £1.39 to 99p, when the VAT cut would only amount to a discount of about 17p.

What if I have a future hotel or holiday rental booking?

We've been contacted by several MoneySavers with future hotel bookings, asking if they should now be given a discount when they pay, or a partial refund, as their accommodation provider will now pay a lower rate of VAT.

One MoneySaver, Jane, emailed: "I booked a holiday apartment last year for this August and paid a deposit, and I've now been sent an invoice to pay the balance. I was expecting to see a reduction in the balance to reflect the VAT reduction as the service will be provided after 15 July – can I pay a reduced rate?"

As above, businesses DON'T have to pass on the VAT cut, so you don't have an automatic right to a discount or refund if your booking is after Wednesday 15 July.

The Institute of Chartered Accountants in England and Wales told us accommodation providers don't have to give discounts or refunds either on deposits that have already been paid or any remaining balance still to pay – saying it's up to the individual hotel whether to pass on the saving or not.

However, some hotels may decide to give discounts now that the VAT rate has been lowered – again, there's likely to be variation. Accor, which runs hotel brands such as Novotel, Mercure and Ibis, told us it would apply the VAT reduction on all future payments on both new and existing bookings. But Radisson told us it is still reviewing its rates following the Government announcement.

If you have other questions or believe you're being asked to pay more than you should, let us know at news@moneysavingexpert.com.