So if the money was never yours in the first place, is the real issue here that you can't charge the correct amount to make a decent profit because of perceived value?
I’ll dive into a little more in the next piece. But let’s say I need to charge £30 on a dish to make money. Then we have to stick 20% on to cover VAT, making it £36.
Then we say to ourselves, oh god, people will never pay that much, the perceived value isn’t there etc. VAT doesn’t flex, so we have to take a hit on the margin, or take the gamble in charging a price that we expect people will hate.
(Then someone goes online and says, “they charge HOW MUCH for cauliflower cheese? Bloody rip off merchants)
This is one of the clearest operator explanations of VAT I’ve read.
The key point is that hospitality isn’t a neutral conduit. When your two biggest costs are labour and largely zero-rated food, there’s very little to offset. Twenty percent isn’t just a consumption tax in this sector. It compresses margin directly.
The £1m example makes it real. Strip out VAT, then 30% food, then 35–40% labour, then fixed costs. What sounds like scale quickly becomes fragility.
And the threshold cliff is telling. When rational operators cap turnover to avoid registration, that isn’t poor ambition. It’s the system shaping behaviour.
Whether 20% is right or wrong is political. But structurally, it clearly lands harder here than in sectors with reclaimable inputs and fatter margins.
So if the money was never yours in the first place, is the real issue here that you can't charge the correct amount to make a decent profit because of perceived value?
Short answer: Yes
I’ll dive into a little more in the next piece. But let’s say I need to charge £30 on a dish to make money. Then we have to stick 20% on to cover VAT, making it £36.
Then we say to ourselves, oh god, people will never pay that much, the perceived value isn’t there etc. VAT doesn’t flex, so we have to take a hit on the margin, or take the gamble in charging a price that we expect people will hate.
(Then someone goes online and says, “they charge HOW MUCH for cauliflower cheese? Bloody rip off merchants)
This is one of the clearest operator explanations of VAT I’ve read.
The key point is that hospitality isn’t a neutral conduit. When your two biggest costs are labour and largely zero-rated food, there’s very little to offset. Twenty percent isn’t just a consumption tax in this sector. It compresses margin directly.
The £1m example makes it real. Strip out VAT, then 30% food, then 35–40% labour, then fixed costs. What sounds like scale quickly becomes fragility.
And the threshold cliff is telling. When rational operators cap turnover to avoid registration, that isn’t poor ambition. It’s the system shaping behaviour.
Whether 20% is right or wrong is political. But structurally, it clearly lands harder here than in sectors with reclaimable inputs and fatter margins.
Looking forward to part two !!!
Thank you!
Perfectly put Dan, let’s hope common sense (and more well written articles like this) make the current administration take note
Thanks Johnny. I won’t hold my breath on that though!
Neither will I but as restaurateurs we are the eternal optimists