A £4bn cut in VAT has come into force, allowing firms in the food, drink and hospitality sectors to slash prices.
Starbucks and McDonald’s are the latest firms to promise reductions after the chancellor ordered a temporary VAT cut from 20% to 5%.
The Treasury estimates households could save £160 a year on average, but not all firms may pass on the benefit.
Many companies are expected to use the windfall to shore up finances hit by the lockdown, rather than cut prices.
The VAT reduction will stay until 12 January next year, Rishi Sunak announced in his mini-Budget last week. It was part of a package of measures to help firms recover and get consumers spending.
VAT – Value Added Tax – is paid on multiple everyday goods and services, but the tax is usually included in price most consumers see.
On Tuesday, Starbucks said it had made the decision to pass on the full 15% discount on coffee served in company-operated stores. Other shops and venues with Starbucks licences will left to pass on whatever reductions suit their business.
Alex Rayner, general manager of Starbucks UK, said the move was a contribution to benefit local business and help customer confidence.
And McDonald’s said it had recommended its franchisees cuts prices on an array of products, including classics like the Big Mac and Quarter Pounder. There will also be price cuts on coffee.
In the UK, the vast majority of the 1,350 McDonald’s outlets are owned and operated by individual business men and women, with each franchisee running an average of six restaurants each. But Mr Pomroy said that only four outlets across the UK are currently open for dine-in customers, with the remainder offering takeaway service.
Paul Pomroy, McDonald’s chief executive for UK and Ireland, said he hoped the price cuts being introduced were a sensible balance between boosting consumer demand and supporting franchisees in getting staff back to work.
What is VAT?
Value Added Tax, or VAT, is the tax you have to pay when you buy goods or services.
The standard rate of VAT in the UK is 20%, with about half the items households spend money on subject to this rate.
There is a reduced rate of 5% which applies to some things like children’s car seats and home energy.
When you see a price for something in a shop, any VAT will already have been added.
There are also various items for which you do not have to pay any VAT, such as most supermarket food, children’s clothing, newspapers and magazines.
It is clear that many businesses will not be passing on the reduction. Malcolm Bell, chief executive of Visit Britain, said the chancellor’s move was to support business, not help holidaymakers.
He said some firms had reported tourists calling them to ask for 15% off their holiday booking. “My message to customers is this is to help the businesses, not to reduce the cost of their holiday. It is only a temporary relaxation up to January,” he said.
Many attractions such as museums, parks and zoos, may also not pass on the reduction.
Bernard Donoghue, director of the Association of Leading Visitor Attractions (Alva), said he expects the VAT cut will go towards helping venues “repair their finances as opposed to being passed on to customers”.
Alva members were seeing a spike in demand after three months of lockdown, with attractions that offer pre-booked visits “vastly oversubscribed”, he said.
Pub chain Wetherspoon said it will reduce prices on meals, coffee and soft drinks. The company has produced promotional posters to advertise food price cuts, including one called Sunak’s Specials and another called Dishi Rishi.
Wetherspoon chairman Tim Martin has campaigned for tax equality between pubs, restaurants and supermarkets for many years. He said: “Supermarkets pay no VAT on food sales and pubs pay 20%. Supermarkets pay about 2p per pint of business rates and pubs pay about 20p.
He said: “A VAT reduction will help pubs and restaurants reverse this trend – creating more jobs, helping High Streets and eventually generating more tax income for the government.”
But he said that not every hospitality business will be able to reduce prices immediately.
“Some will need to retain the benefit of lower VAT just to stay in business. Others may need to invest in upgrading their premises.
“However, lower VAT and tax equality will eventually lead to lower prices, more employment, busier high streets and more taxes for the government.”