The hospitality sector is under pressure from rising costs, cautious consumer spending and strong competition from supermarkets and convenience retailers.
For restaurants, pubs and cafés, one of the least understood pressures is VAT.
Customers often compare the price of eating out with the cost of buying food from a supermarket, but the VAT treatment behind those prices can be very different. Many supermarket food items are zero-rated for VAT when sold for home consumption. Food served in a restaurant, pub or café is standard-rated when eaten on the premises.
That difference can affect pricing, margins and competitiveness.
For hospitality businesses, VAT is not simply a finance issue. It can influence how menus are priced, how promotions are structured, how tills are set up and how much margin is left after tax and operating costs.
Why VAT matters for hospitality businesses
VAT is charged at 20% on mostthingsin the UKbut not most food. Where food is served as part of catering, or consumed on restaurant, pub or café premises, the standard rate will apply– this is essentially because the zero rated food loses its identity for VAT and becomes standar rated catering services.
That means a £12 VATinclusive meal does not leave the business with £12 of income. One-sixth of that price is VAT, so £2 is due to HM Revenue & Customs before the business accounts for ingredients, staff costs, rent, utilities, insurance, card fees or other overheads.
For hospitality operators already managing rising employment costs, food inflation and energy bills, that VAT element can be significant.
The issue is especially important because many hospitality businesses are small, local and labourintensive. They may not have the pricing power of larger retailers or the ability to absorb tax costs over large sales volumes.By the same token, larger hospitality businesses also employ people and their ability to consider doing so is similarly impacted.
The supermarket comparison
The VAT rules create a distinction that many customers may not realise exists.
A supermarket can sell many cold food products for home consumption at the zero rate. A café sellingthe samefood for customers to eat on its premises will have to charge VAT at 20%.
That does not mean every supermarket food product is zero-rated. There are important exceptions, including confectionery, crisps, soft drinks, hot food and hot takeaway food. However, the broader point remains: many supermarket food purchases are treated differently from meals eaten in hospitality venues.
From a consumer perspective, the comparison is simple. They see the final price.
From a hospitality business perspective, the comparison is more complex. The business may be competing with supermarket food options while also having to build 20% VAT into the price of eat-in meals.
That creates a commercial challenge. If the business passes the VAT cost on to customers, prices may rise. If it absorbs the cost, margins fall.
How UK hospitality VAT compares with Europe
The VAT issue is not only about competition between hospitality businesses and supermarkets. It is also about how the UK compares with other European visitor destinations.
Many European countries apply reduced VAT rates to hotel accommodation, restaurants, cafés or catering services. The exact rules vary by country and by type of supply, and alcoholic drinks are often treated differently. However, the broad comparison is important.
In several major tourism markets, hospitality VAT rates have historically been lower than the UK’s 20% standard rate. For example, Spain, France and Italy have applied 10% VAT rates to restaurant and catering services, while Cyprus has applied 9%. Hotel accommodation has also benefited from reduced rates in many European countries.
This creates a further competitiveness issue for UK hospitality.
Restaurants, pubs, cafés and hotels in the UK are not only competing with supermarkets and consumer spending pressures at home. They are also part of the wider visitor economy, competing with European cities and holiday destinations for international tourists.
For tourists, VAT is rarely visible as a separate issue. Visitors usually judge the total cost of a trip. That includes accommodation, meals, attractions, transport and shopping. Where VAT increases the price of eating out or staying in the UK, it can affect how expensive the destination feels.
This is particularly important for cities such as London, Edinburgh, Manchester, Liverpool, Bath and York, as well as coastal and rural destinations that rely on visitor spending.
Tourism supports a broad supply chain. A visitor eating in a restaurant may also spend money on hotels, theatres, galleries, taxis, trains, shops and local attractions. If the UK becomes less competitive on price, the impact can spread beyond hospitality businesses alone.
The comparison with Europe does not mean the UK should simply copy another country’s VAT system. Each country has its own tax base, public finances and policy choices. However, it does show that a 20% VAT rate on many UK hospitality supplies is not inevitable.
For businesses in the sector, this adds another reason to monitor VAT carefully. The correct VAT treatment can affect pricing, margins and customer perception, particularly where businesses rely on tourist trade or operate in areas where visitors have a choice between the UK and other European destinations.
Why the temporary summer VAT cut does not solve the wider issue
The Government has introduced a temporary 5% VAT rate for certain children’s meals, children’s tickets and family attractions during the 2026 school summer holiday period.
The relief applies from 25 June 2026 to 1 September 2026 and covers specific supplies, including certain children’s meals provided by restaurants, cafés and similar catering establishments for consumption on the premises.
This is a welcome measure for businesses that can use it, particularly where family trade is important. However, it is limited in scope.
The reduced rate does not apply to all hospitality sales. It does not apply to adult meals. It does not apply to takeaway meals. It also does not apply simply because a meal is a smaller portion, a lowercalorie option or a discounted adult meal.
To qualify, a children’s meal must be held out for sale only as a children’s meal and supplied as part of catering services for consumption on the premises.
That means businesses need to review menus, till systems, pricing, staff training and VAT coding carefully before applying the reduced rate.
More fundamentally, the measure intended to help the consumer, not the hospitality business – it is short term and thiswill not alleviate the pressures created by the higher cost of employing staff or business rates – these remain in place.
The long-running campaign for lower hospitality VAT
The hospitality and tourism sector has campaigned for a lower VAT rate for many years.
The argument is that a reduced VAT rate could help businesses reduce prices, stimulate demand, protect jobs and support investment. Supporters also argue that hospitality is a high-employment sector with a strong connection to high streets, tourism, leisure and local communities.
During the Covid-19 pandemic, the Government introduced a temporary reduced VAT rate for hospitality, holiday accommodation and attractions. The rate was initially reduced to 5%, later moved to 12.5%, and returned to 20% from April 2022.
Since then, calls for a lower rate have continued, but successive governments have resisted a permanent reduction because of the cost to the Exchequer and uncertainty over how much of any VAT saving would be passed on to customers.
This creates a difficult policy balance. A broad VAT cut could be expensive, but the current rate also has consequences for pricing, jobs, investment and business viability.
Practical VAT issues for restaurants, pubs and cafés
Hospitality VAT is not always straightforward. Businesses should not assume that every sale is treated in the same way.
Areas that may need review include:
Eat-in and takeaway sales
Food eaten on the premises is standard-rated. Cold takeaway food may be treated differently, depending on the product and where it is consumed.
Hot takeaway food
Hot takeaway food and hot home deliveries are generally standard-rated.
Children’s meals
From 25 June 2026 to 1 September 2026, some children’s meals may qualify for the temporary 5% rate, but only where the conditions are met.
Vouchers and gift cards
The VAT treatment can depend on whether the voucher is single-purpose or multi-purpose, and when VAT becomes due.
Service charges and tips
Businesses should check the VAT and payroll treatment of service charges, discretionary payments and tips.
Deposits and cancellations
Deposits, no-show charges and cancellation fees can raise VAT questions, particularly for events, bookings and private dining.
Events and catering
Event catering, room hire, food, drink and entertainment may involve mixed supplies with different VAT considerations.
Input tax recovery
Businesses should check whether they are recovering VAT correctly on costs, particularly where they have both taxable and exempt income.
Why VAT reviews matter
A VAT review can help hospitality businesses identify both risk and opportunity.
If VAT is undercharged, HM Revenue & Customs may later assess the business for unpaid VAT, interest and penalties. If VAT is overcharged, the business may be pricing itself less competitively than necessary or reducing its own margin.
For businesses operating on tight margins, both outcomes matter.
A review should consider how sales are coded through the till, how menus are structured, how promotions are set up, how online ordering platforms treat VAT, and whether staff understand the difference between eat-in, takeaway, children’s meals and other sale types.
It is also important to keep evidence. VAT liability often depends on the facts, including how something is marketed, priced, packaged and supplied.
What hospitality businesses should do now
Hospitality operators should use the temporary summer relief as a prompt to check their wider VAT position.
Practical steps include:
- reviewing children’s menus before 25 June 2026;
- checking which items can and cannot use the temporary 5% rate;
- updating till and accounting systems;
- training staff on eligible and non-eligible sales;
- reviewing eat-in and takeaway VAT coding;
- checking vouchers, deposits and service charges;
- reviewing input tax recovery on costs;
- documenting the VAT treatment applied.
This is particularly important for businesses with multiple sites, changing menus, online ordering, delivery platforms or seasonal promotions.
Key takeaway
The VAT treatment of hospitality food sales remains a major commercial issue.
Restaurants, pubs and cafés are competing with supermarkets and at-home food options, but they do not always operate under the same VAT rules. Many supermarket food items are zero-rated, while food eaten in hospitality venues is standard-rated.
The temporary 5% VAT rate for certain children’s meals and family attractions is welcome, but it does not address the wider structural pressure on the sector.
For hospitality businesses, the practical message is clear: understand the VAT rules, check your systems and keep your VAT position under review.
VAT may not be the only pressure facing hospitality, but it is one that directly affects pricing, margins and cashflow.
For support with hospitality VAT, VAT liability reviews, VAT recovery or HMRC enquiries, contact Blick Rothenberg’s Indirect Tax team.
