Is Britain’s Hospitality Sector at a Breaking Point Due to Rising Taxes?

Is Britain’s Hospitality Sector at Breaking Point Due to Rising Taxes?

The UK’s hospitality sector, encompassing pubs, restaurants, hotels, and cafés, is facing unprecedented financial pressure. While grappling with the aftermath of the pandemic, soaring energy costs, and persistent inflation, businesses now find themselves squeezed further by a heavy tax burden. Key industry bodies are warning that the combination of Value Added Tax (VAT), business rates, and alcohol duty, alongside rising operational costs, is pushing many businesses towards a breaking point, potentially leading to widespread closures and job losses.

The Triple Tax Burden: VAT, Business Rates, and Alcohol Duty

Hospitality businesses navigate a complex web of taxes that significantly impact their operational viability.

• Value Added Tax (VAT): Unlike many European counterparts offering reduced rates for hospitality, the UK largely applies the standard 20% VAT rate to sales in pubs, restaurants, and hotels. While temporary reductions were implemented during the pandemic, the return to the standard rate adds significant pressure. Industry groups like UKHospitality frequently advocate for a permanently lower VAT rate, arguing it would boost demand, support businesses, and align the UK with international competitors. Navigating VAT rules for different offerings (eat-in vs. takeaway, alcoholic vs. non-alcoholic drinks) adds complexity.
• Business Rates Squeeze: Business rates, a tax on commercial property, disproportionately affect hospitality venues due to their often prime locations and physical size. Tied to property value rather than turnover, these rates can cripple businesses during downturns. Recent revaluations and changes to relief schemes, such as the reduction of the Retail, Hospitality and Leisure relief from 75% to 40% for 2025/26, are set to increase the burden significantly for many, particularly those with rateable values above £51,000.
• Alcohol Duty Impact: For pubs and bars, alcohol duty is a major cost. Recent changes aim to tax drinks based on strength, but overall duty levels remain a concern. While ‘Draught Relief’ offers a discount for beer and cider sold on tap, the duty on many other products impacts purchasing costs and consumer prices, potentially dampening demand, especially when combined with VAT.

This combination of taxes creates a challenging financial landscape, demanding careful planning and potentially external financial support.

The Rising Tide of Operational Costs

Beyond taxes, hospitality businesses are battling a surge in day-to-day operational expenses, further squeezing margins.

• Energy Price Shocks: Soaring energy prices have hit the sector hard, given the high consumption for heating, lighting, and kitchen equipment in often energy-inefficient buildings.
• Wage Pressures: Increases in the National Minimum Wage and National Living Wage (with the NLW rising significantly in April 2025), coupled with staff shortages, have driven up payroll costs. Changes to employer National Insurance contributions also add to the burden.
• Food and Drink Inflation: The cost of ingredients and beverages has climbed steeply due to broader inflation and supply chain issues, impacting menu costs and profitability.

These escalating input costs create acute cash flow challenges for many businesses, making it difficult to cover immediate expenses.

Sector Under Strain: Pubs, Restaurants, and Hotels Feel the Pinch

The combined weight of heavy taxation and soaring costs is having a tangible impact across the UK hospitality landscape.

• Closures and Financial Distress: Industry reports indicate a concerning number of pubs, restaurants, and hotels closing or facing insolvency. While overall site numbers showed some stability in 2024 after previous declines, closures accelerated in the final quarter, suggesting underlying fragility. Some estimates warn of thousands more closures in 2025 if trends continue.
• Reduced Profitability: Squeezed between rising expenses and consumer price sensitivity, profit margins are significantly eroded, impacting financial health and long-term viability.
• Menu Price Hikes & Consumer Impact: Many operators are forced to pass costs to customers via higher prices, potentially affecting demand, especially if disposable incomes are pressured.
• Stifled Investment: Financial uncertainty and cash flow pressures force businesses to postpone essential investments in refurbishment, equipment, training, or expansion, hindering growth and competitiveness.

Calls for Action: Industry and Government Responses

The hospitality sector is actively seeking government support to alleviate these pressures.

• Industry Body Appeals: Organisations like UKHospitality and the British Beer and Pub Association (BBPA) consistently lobby for reforms, particularly on business rates and VAT, and for measures to mitigate energy and labour costs.
• Government Policies/Support: Government responses have included temporary energy support, adjustments to alcohol duty (like Draught Relief), and business rates relief schemes (though the upcoming reduction in relief is a major concern). The government points to measures like freezing the small business rates multiplier and the planned permanent lower rates for smaller RHL properties from 2026/27, but the industry often argues these don’t go far enough or address the immediate crisis facing many businesses.

Navigating the Storm: Business Finance Options with NexGen

The challenging economic climate highlights the critical role of access to appropriate finance for hospitality businesses’ survival and recovery. When traditional funding routes are constrained, specialist support is vital.

NexGen Business Finance is an expert broker committed to supporting UK businesses through turbulent times. We understand the unique pressures facing the hospitality sector – managing volatile cash flow, funding essential refurbishments, navigating rising costs. Our key advantage lies in our extensive network: we provide access to over 95 lenders across the UK. This broad reach significantly increases your chances of securing the right finance package, even if your bank has been unable to assist. We offer personalised support from a dedicated account manager and charge no broker fees for our service.

Here are some finance options available through NexGen that can help address specific hospitality challenges:

• Business Loans (Unsecured & Secured): Suitable for planned investments (£5,000 – £500,000+) like refurbishments, kitchen upgrades, expansion, or managing working capital. Flexible repayment terms (1 month – 7+ years) available.
• Merchant Cash Advance (MCA): Ideal for businesses with fluctuating revenue. Receive an advance based on future card sales, repaid via a percentage of daily takings, providing flexibility during quieter periods.
• Invoice Finance (Factoring/Discounting): Relevant for hotels or restaurants invoicing corporate clients. Unlocks cash tied up in unpaid invoices (up to 90% upfront), improving cash flow significantly.
• Asset Finance: Funds essential equipment (ovens, refrigerators, EPOS systems, furniture) via leasing or hire purchase, spreading costs and preserving capital.
• Bridging Loans: Provides short-term funding to cover gaps, perhaps during property transactions or refurbishment projects.

These tailored finance options, accessed via NexGen’s extensive lender panel, can serve as a crucial lifeline, helping hospitality businesses manage immediate cash flow crises and overcome investment paralysis caused by current economic pressures.

Conclusion

The UK’s hospitality sector is navigating a perfect storm of rising taxes and escalating operational costs. While inherently resilient, the current pressures are proving unsustainable for many pubs, restaurants, and hotels. Without effective support and strategic financial management, the sector faces the real risk of significant contraction. Accessing the right financial tools is critical, not just for survival, but for adaptation and future growth. Exploring tailored finance options, such as those facilitated by NexGen Business Finance, can provide the necessary capital to weather the storm, invest strategically, and help secure a more stable and prosperous future for this vital part of the UK economy.

Is your hospitality business feeling the pressure from rising costs and taxes? Explore tailored finance solutions with NexGen Business Finance to help navigate these challenges.