Over the past year, the UK’s hospitality industry has faced relentless challenges. Since the pandemic halted trade, venues have struggled with rising rents, business rates, and food and energy price hikes. The end of Covid relief and the ongoing cost-of-living crisis have further squeezed household spending.
Daniel Alvarado, food and beverage director at DININGS SW3 London, calls this “the perfect storm” – mounting closures, unemployment, and crippling taxes. Without decisive action, 2026 could be devastating for the industry, he says.
With the UK’s VAT – the tax on goods and services – now the second highest in Europe after Denmark, the industry is urging the government to cut it from 20% to 10% to match countries such as Germany, Ireland, France, Italy, and Spain.
UK Chancellor Rachel Reeves has announced a temporary 5% VAT on children’s meals and certain attractions this summer, but further VAT reform remains uncertain, even as the industry’s plea gains traction.
“The hospitality industry is on its knees, with closures across every sector,” says Julian Edwards FCSI, chair of FCSI Europe, Africa, Middle East (EAME). “We’re very close to a precipice or a tipping point, and this is reflected across the entire UK hospitality system, as the tipping point is far-reaching. One mitigation is the ongoing campaign to reform how VAT is charged on hospitality and leisure.”
Avoiding the vicious cycle
The ‘VAT’s The Problem’ petition, led by chef Tom Kerridge and major trade bodies such as UKHospitality, argues that 10% VAT is sufficient for the hospitality industry.
“Our margins keep getting squeezed,” says Alvarado. “If VAT drops to 10%, we can pass savings to guests and avoid further price hikes.”
But despite government-mandated support packages such as Eat Out to Help Out, and previous pandemic relief on VAT, UKHospitality notes that three businesses have closed daily since 2026 began – a sobering fact given that hospitality remains the UK’s third largest employer.
“A natural logic at the moment is to overprice tariffs to keep the doors open,” says Edwards. “But this comes at a considerable and detrimental cost, which could result in losing customers.”
While one option is to pass price increases onto customers, those in the business know this will be a sure-fire way to deter customers who are also feeling the squeeze.
“That creates a vicious circle,” adds Alvarado. “We want to keep menus affordable and encourage visits, but rising living costs mean families and individuals living in already very expensive cities are watching every penny.”
Businesses and operators are being forced to consider whatever they can to reduce costs and protect profitability, from purchasing spend to menu optimisation, waste reduction, supply chains and more.
“Changing the quality is the last thing I would ever do, but some will take that route,” says Alvarado. “That’s possibly the worst decision you can make, because the customer will feel it right away, particularly if prices stay the same or go up. But some have no choice, there’s not much more they can do.”
The snowball effect
Repeat customers are critical to survival, emphasizes Alvarado: “Hospitality doesn’t operate on big margins. We need regulars and strong communities. It’s more than just a business.”
But even so, current profits are far from luxurious for business owners, restaurateurs, and their local communities. Indeed, for many businesses, turnover is barely covering operating costs.
“The hospitality sector is dividing rapidly. The top end of hospitality and retail, like sports venues and concert venues, can rely on a captive affluent audience, which ensures a significant gross profit to cover costs and continue with a reasonable profit,” says Edwards FCSI. “The remaining sector, particularly the public sector, which doesn’t have such an affluent customer base and tolerance for tariff increases, is the sector being penalized the most.”
“This extends to midline food and beverage outlets, the average pub, the average restaurant, and the average quick-service and fast-food restaurant,” Edwards continues. “These are the backbone of British hospitality, which keep our communities together.”
This snowball effect – higher prices, fewer customers, lost jobs – threatens the sector’s future.
“At this point, we are taking those hits without increasing our prices, but some places cannot survive,” says Alvarado. “We want to encourage communities to have small operators, independent venues, and family-run restaurants, not just big chains. We want to employ local communities, to get our neighbors involved, to show people British produce, but this is causing a big problem.”
The next generation
Another ripple effect hindering this is that, as UK cities become increasingly expensive, combined with other societal changes brought on by the pandemic, remote working and lower footfall are also driving down hospitality business profits.
“Delivery, funnily enough, has increased,” says Alvarado. “Maybe people are deciding to stay home with a nice bottle to reduce costs. The other thing that I’m thinking about is that people are less interested in experience.”
Furthermore, the cost of recruitment is prompting operators to think twice about hiring new staff, and instead shift operations without expanding teams, while also navigating evolving employment laws.
“If we cannot teach these skills to our future generations, helping communities and young people develop into their first job, giving them tools to build confidence and communication skills, having to pick up the phone… We’re an industry that can react very quickly, and we’ll just have to change, but that impacts those around us,” says Alvarado. “We can automate some tasks, but people come in to have an experience, to make them feel special.”
But with that comes a sobering reality. For an industry that employs 28% of all 18 to 20-year-olds, according to the Institute of Fiscal Studies, employment opportunities are disappearing. This means greater unemployment rates for young people and fewer opportunities for them to get their foot in the door in a challenging labour market. Without incentives, people might also opt for better-paid remote jobs or leisure at home to save money, reducing hospitality’s appeal.
An uncertain future
From reducing VAT to building strategies and strengthening partnerships to bolster supply chains, there is “light at the end of the tunnel” says Edwards, as initiatives focus on reducing costs for diesel for tractors to support local farming as one example, and “reigniting the British industrial spirit, as we’re more reliant on imports to keep us going”, but more government help is needed, Edwards urges.
“It’s a continuous battle to try and be as innovative as possible to reduce the food costs and beverage costs for production, whilst keeping a tariff that will attract customers,” says Edwards. “Help is critical, and certainly my colleagues and I at FCSI are working closely with clients to support and explore innovation, automation, and AI technology to reduce general overheads and make it as efficient as possible, but we are very close to that tipping point.”
With hospitality venues at the heart of communities, more government support is needed. Without it, more closures, and the consequential impacts on communities, will be inevitable.
“We really are at that point in the history of British hospitality,” warns Edwards. “People sometimes say the hospitality sector is robust and adaptive, and it is, but there’s only so much we can eke out of a very poor situation.”
Further details:
To sign the petition, visit: vatstheproblem.co.uk/.
Lauren Hurrell
