The UK economy has been met with the worst recession in history due to the outbreak of Coronavirus, with one of the hardest hit sectors being travel and hospitality. There has been a wealth of government resource which has had to be provided to businesses across the country, however none that are sector specific to date. Government announcements have been issued at rapid rates and re-opening dates for the industry remain uncertain, making it difficult for businesses to plan and budget.
Saffery Champness Partner Roger Wareham looks at five key issues that are particularly topical for the hospitality sector at present:
1. Social distancing – a new 1m rule?
The UK government has come under recent pressure from the hospitality sector to reduce the social distancing measures from two metres down to one. Whilst social distancing restrictions in any form negatively impact trade for most businesses within the sector, the reduction down to one metre could be the difference between around 75% of pubs and restaurants reopening and capacity increasing as much as 40%.
The official advice from the World Health Organisation is for people to stay at a minimum of one metre apart during the pandemic and this has seen countries such as France, China and Denmark implementing a one metre rule.
More than half of the Conservative cabinet have shown support for the reduction in distancing measures including business secretary, Alok Sharma, who stated that more than 3.5 million jobs in the hospitality sector would be at risk if the UK didn’t have a “lucrative summer”, hence calls for a one-off autumn bank holiday.
Boris Johnson has stated that the measures are “constantly under review” and we expect to hear more by 4 July 2020 – the earliest date expected for the re-opening of the sector per government legislation at the time of writing.
2. The furlough scheme and the hospitality sector
Changes to the government’s Coronavirus Job Retention Scheme (CJRS) have been welcome news for the hospitality sector, which has been one of the hardest hit sectors during the Coronavirus pandemic. It is estimated that only 11% of the sector has been able to operate normally since the crisis began.Rishi Sunak announced on 12 May that the CJRS would be extended from 30 June to 31 October 2020, with employers being allowed to bring furloughed staff back for part-time work as of 1 July 2020.
The government will continue to pay the lower of 80% of the wage bill or a cap of £2,500 a month until the end of July, after which employers will be required to begin making staged contributions towards these wages until 31 October, at which point the scheme will end.
Whilst this offers a short-term ease to cash flow for the country it is expected that, of the 8.4 million employees that have been furloughed since the start of the UK lockdown, one in three works in the hospitality sector.
The sector is one of the last to be able to re-open and with the current social distancing measures in place, full capacity cannot be reached for the majority of businesses. Trade bodies have expressed their concerns in light of the staged cessation of the scheme and have called out for other sector specific support measures to be implemented.
3. Rent standstill
At the start of lockdown, many businesses faced possible eviction over a lack of funds to keep paying their rent bills. Though the government announced that commercial tenants would be protected from eviction for a three-month period, ending 23 June 2020, the rent still remains due, unless otherwise agreed with property landlords. Furthermore, with the June rent quarter approaching at the same time, this could come as a final blow for many.
Trade body, UK Hospitality, has written to the Chancellor to warn that, unless financial support persists, then many businesses will face extinction, jobs will be lost and rent will not be paid.
Proposed schemes so far have included the introduction of tax credits to incentivise rent waivers, property bounce back bonds to cover lost revenue and a furloughed space grant scheme (FSGS).
The proposed FSGS would result in the government making tapered fixed property payments depending on the level of trade that the business is able to undertake. This would require an audited 24-month cash flow to be provided. A similar scheme has been seen in practice in Denmark.
A scheme such as this would however qualify as State Aid under EU law and so must pass onerous tests to be enabled. In addition, the government appears to have avoided providing sector-specific support during the crisis so far, instead urging landlords to obtain loans under the Business Interruption Loan Scheme. As such, it may be that the FSGS is not being considered an option at this stage.
4. Will the UK cut its VAT rates for the hospitality sector?
The UK is now one of the very few European countries not to have cut its VAT rates. Germany is due to reduce its VAT rate for the country as a whole (from 19% to 16% from 1 July to 31 December), and will also make reductions in its reduced rate, due to fall from 7% to 5%.
The UK has made similar changes in the past, notably during the 2008 recession, at which point it cut its standard VAT rate down from 17.5% to 15%. This was costly to the government and done in order to boost customer confidence. However, this reduction was not necessarily met with an overwhelming boost to the economy as hoped with many businesses struggling to pass the costs on to customers.
However, changes to VAT rates are quick and easy to administer and will provide an immediate ease to cash flow for the majority. It is a definite possibility that the government will cut the standard VAT rate to 15% (the lowest it can go while the UK is still governed by EU VAT law) in the near future.
5. Hidden Coronavirus costs and cashflow forecasting
Re-opening hospitality businesses is costly in itself. Not only will there be reduced capacity due to social distancing requirements, but there will also be financial investment required to make spaces safe for customers and staff (“social distancing ready”). These might include the cost of installing protective screens, providing additional staff, staff training and PPE, and sanitiser stations among many other potential costs. Footwear retailer, Kurt Geiger, has suggested that such measures could add an additional £75,000 per store to its costs for the year.
Whatever the level of preparation required, businesses will need to ensure their forecasts include any additional costs expected, as well as reductions to the furlough support scheme and the reintroduction of rent payments. Whilst there may be future hospitality-specific support measures introduced, we strongly recommend businesses forecast as prudently as possible to ensure that they are braced for recommencing trade