286. Dan Neidle: Pubs don’t deserve a VAT cut

0:0010 billion pounds, that is an awful lot of money. Sorry, 10 billion pounds just for restaurants and hospitality? Good God. VAT is a really big tax. Hospitality is a pretty large, large part of the economy. You know, people like Andy Burnham talking about what he would do if he came into power cutting business rates for pubs. And those in the hospitality sector saying that they want a cut on VAT for pubs and restaurants to 10%. It's a terrible idea. And out of all the things we could do with£10 billion, which is what it would cost, this is one of the worst. So talk us through why the likes of Tom Kerridge are wrong that cutting VAT would be the right thing to do.

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3:23Hello and welcome to The Rest is Money with me, Robert Paston. And me, Steph McGovern. And back with us is Dan Needle from Tax Policy Associates. Now, Dan, obviously a friend of the show. We love getting him on because he knows absolutely everything there is to know when it comes to tax. And it is really in the news at the minute. We've got chefs calling for cutting VAT for pubs and restaurants to 10%. And we've got Andy Burnham out talking about tax, haven't we, Robert, too? We have. Andy Burnham in Makerfield trying to be their MP, also trying to be our next Prime Minister. And one of the policies that he hopes will make him more popular is he says he wants to help pubs by cutting the council tax they pay.

4:06So does that make any sense at all? How should we help struggling smaller businesses? So here's our conversation with a guy who knows everything about that kind of thing, Dan Needle. Dan, good to have you back. We want to jump straight into talking about the kind of the noise around VAT at the moment and the pressure that's putting on businesses along with, you know, obviously there's the national insurance contributions going up for employers. There's the fact minimum wage has gone up. There's lots of talk around business rates as well. So lots of businesses are really feeling the pressure and we're hearing chefs and those in the hospitality sector saying that they want a cut for VAT on VAT for pubs and restaurants to 10%.

4:53So first of all, what do you think about this? Is that something that you think, Dan, would make a difference, this rate cut to the hospitality sector? And, you know, would it be fair, I guess? It's a terrible idea. It's a really bad idea. And out of all the things we could do with£10 billion, which is what it would cost, this is one of the worst. So talk us through why the likes of Tom Kerridge are wrong that cutting VAT would be the right thing to do. There are so many reasons this is a bad idea. It's quite hard for me to get them out coherently, but I have a go. The first thing is the cost.

5:29£10 billion. That is an awful lot of money. Hang on. Sorry,£10 billion just for restaurants and hospitality? That's the cost of that? 10 billion. A lot of money. And if you were the chancellor and a magic pixie appeared and gave you 10 billion pounds, would you use it for this? I think you probably wouldn't. It's the benefit of it who gets it. So whenever you have a VAT cut in one service, the evidence suggests that it's the producer who gets it, not the consumer. When there was a VAT was abolished on eBooks, that followed a long campaign by the publishing industry who promised it would reduce prices.

6:10It didn't. We couldn't see any change in prices at all. All the benefit went to people selling e-books. Same would happen here. So yes, that would help small struggling family restaurants that are currently having difficulty, but most of the money wouldn't go there. Most of it would go to the really big guys, chain restaurants, large hotels. Why are we giving money to the Ritz? So basically what you're saying is this price cut, which is essentially what they're arguing it for, wouldn't actually be a price cut for consumers. It would just be a profit gain in terms of an increase in margins for the actual restauranteurs.

6:46restaurateurs. I mean, I think that's intuitive. If you go to the man or woman in the street and say, hey, we're going to cut VAT on a product. Do you think the person selling the product is going to pass on that benefit or are they going to keep it to themselves? I think most people's intuition would be, well, of course, they'll keep it to themselves. And the evidence across Europe studying over 100 VAT cuts has shown that's what happens. But these are restaurants that are struggling, a lot of them. So how would you then, surely they'll want to bring down that prices in order to get more people through the doors.

7:15And then in the longer term, that's potential tax revenues going up because they'll be making more profit and more people will be coming into the business. You might think so, but the evidence suggests that in the main, in fact, almost entirely, that doesn't happen, that the difference is kept as additional profit. So can I just make the counter argument that some would make, which is that many of these businesses are either going bust or are quite close to going bust. And rebuilding their margins would keep them alive, would preserve employment, and potentially would increase employment. This is, again, obviously an argument that you don't find compelling.

8:00Well, it's a very inefficient way to do it. If you wanted something targeted at struggling small businesses, you could think about ways of doing that rather than a 10 billion VAT cut, most of which will not be going to those guys, but will go to large chains. And can I just ask you another question, which has gained quite a lot of attention, which is, does it matter that the costs on British restaurants, and in particular from VAT, are significantly higher than in other countries? Because it is the case, I mean, and I have actually sort of double-checked that this is the case, that the indirect cost of VAT in this country is, in some cases, double the equivalent tax on other European countries and, indeed, in America.

8:46You take the view that that doesn't matter. Well, I take the opposite view, which is that it's a bad feature of VAT systems to tax different things differently. And when people laugh at disputes over Jaffa Cakes, disputes over whether rotisserie chicken is taxed or not, it's because we have a complicated VAT system, which taxes lots of things differently. We'd be much better off having a simpler system with a lower rate of VAT that applies to everything. And there are countries like Denmark, like New Zealand that do that. We should be copying them, not countries like France that have a whole bunch of special deals to suit special interests, including, yes, hospitality.

9:22So if you look then at those countries you mentioned, where they do have this kind of flat rate VAT across all products and all services and things, What's their income from it then? Do the governments of these countries actually make a decent revenue from it then? Yeah, I mean, the total amount of GDP raised from VAT is, I mean, it varies, but the base, the stuff which is taxed, is just as important as the rate. In this country, we have a kind of average rate at 20%, but our base is incredibly narrow, one of the narrowest in the world. you'd be much better off having a lower rate and a wider base.

10:01None of which is going to help restaurants. But the problem with restaurants isn't VAT. VAT has always, well, for a very long time, been the same rate. That's not causing the problem. We need to look at what the problems are and solve those problems rather than reaching the VAT as some kind of cure or solution, because it's a really bad solution for problems caused by other things. And just to be clear, if we had the broadest base, so we would include food we buy in shops, for example, we might include children's clothes, we might include actual books, as it were, that you think would lead to a much more competitive sort of industries all around?

10:47It would be simpler for everybody. It would be much cheaper for businesses to apply. It would be cheaper for government to collect. Children's clothes, for example, if you look on the Harrods website, you will find an£8 ,000 girl's gold jacket. That is free from VAT, thanks to us. That is not a sensible use of our resources. Much better would be to abolish the VAT exemption for children's clothes, use some of the savings to increase child benefits that the average family is not worse off, and book the savings to slightly reduce the rate. Now, children's clothes are a fairly small element. Food, a much bigger element.

11:27But again, what we should be doing is we should be equalizing the rate with everything else. We should be dropping the rate, and we should be protecting people on lower incomes so they don't lose out. because most of the benefit from the VAT zero rate on food doesn't go to the poor. Most goes to people spending a lot on food, and that's people who are richer. I think you also believe in something that's going to upset people in food trucks who actually, some of them may not cross the VAT threshold. You think the VAT threshold should be reduced very significantly as well, don't you? So that more businesses pay VAT.

12:04There is a big problem with VAT and its effect on business, which is that if you do a chart of the number of businesses for each size of business, each amount of turnover the businesses do, what you'd expect to find is lots of tiny businesses and then fewer and fewer numbers, nice smooth curve to get to a small number of very large businesses. That's what you'd expect. What you actually see is the curve goes down until it gets to the VAT registration threshold. Then there is a huge bump up, a number of additional people deliberately holding their revenue below what's now 90 ,000, and then a cliff edge, and very, very few businesses beyond that.

12:43So VAT incentivizes businesses to not grow, to keep their size below 90 ,000. Now, some people say, oh, well, you should increase the threshold. Madness is bad enough to stop small businesses growing. To stop larger businesses growing is even more economically damaging. So the rational policy there is to have a much smaller threshold, which most of the rest of the world does. Yes, because you also get those businesses that do everything by the book up to the VAT threshold. And then after that, everything's in cash. So that's where the tax revenue potential is being lost as well. So while we're on hospitality, one of the things that is very striking is everybody, every politician loves pubs.

13:24Right. For whatever reason, pretty much every politician I've ever come across thinks if you help pubs, that's a vote winner. I've never actually seen empirical evidence for this, but they definitely it's definitely something they all passionately believe. And unsurprisingly, therefore, Andy Burnham wandering around Makerfield where he wants to be the next MP and where he's campaigning to be prime minister of the UK. He has said that were he to be prime minister, he would cut business rates for pubs, which I suppose raises two questions for me, which is in general, should pubs be a special case?

14:05But secondly, what is your view about essentially cutting council tax as a route to help any sector of business, including pubs? There's something weird about business rates. And the witness is this, there's a difference between the person who pays it and the person who economically is paying it. And in the tax nerd world, you call that economic instance. We're all familiar with one example. So VAT, who pays VAT legally? And the answer is the shop pays VAT. If I go to buy a chocolate bar, there's VAT on the chocolate bar. Who is cutting the check to HMRC? Obviously not me. It's the shop. Who is bearing the cost of the VAT?

14:49Well, you know, that's me. Obviously, if VAT went up by 20 % tomorrow, the shop is not eating that. I, the consumer, am eating that. Sorry. So we say the economic incidence of a rise in VAT falls on consumers. Interestingly, the opposite isn't the case. If you have a VAT cut, the shops tend to snaffle the profit. But that's a different discussion. So, OK, business rates. Who pays the business rates? The answer is the person occupying the property, the pub. But who economically is actually paying that? And the answer turns out to be, and the evidence for this is super strong, mostly it's the landlord in the long term.

15:31In other words, if you increase business rates, then the amount they can charge in rent goes down. And if you cut business rates, the amount they can charge in rent goes up. And the biggest study of this was in 1990 when there was some reform of what were then non-domestic rates. And for every£1 increase in rates, rental values fell in London by 86 pence, meaning that 86 % of business rates in London go through to landlords. Now, in other areas, it's less outside the southeast. It can be only 45%. But either way, if you have a business rate cut on pubs, what you're doing is a tax handout to landlords.

16:19And in some cases, that will be almost all of the cut. In some cases, maybe half the cut. But I mean, obviously, you're saying the big chunk of the evidence is from London. For places outside of London where shops are empty, where, you know, areas are really struggling on their high streets and things. Do you really think a landlord is going to put up the rent equivalent to what the business rates go down by? Because isn't it in the landlord's interest to fill those units and actually have some income coming in? But if it doesn't change how much the costs are for a business, they're not going to be able to sustain the costs.

16:54So it's a lose-lose then for the landlords, isn't it? No, I mean, right now you've got a tenant who's paying£100 and the tenant is also paying business rates of£10. If you change it so that the tenant is paying business rates of£5, well, then they can afford to pay more rent. The market shifts. And that happens because the supply of commercial property is what economists describe as inelastic. Land's fixed. Planning's restricted. Landlords can't easily move the building somewhere else. But on the other hand, tenants' demand is elastic. They can do other things. They can relocate. They can close.

17:32They can move online. They can bargain more. So tenants, when they're negotiating rent and their power, such as they have, to demand and set rent is driven by the total cost of occupying it. And that means rates and rent. So that's a theory. But the evidence has shown that, and that's certainly outside London as well as inside London, just to a lesser extent. Ultimately, it flows through to landlords. And this is not some esoteric secret. This is really well known. Government knows it. IFS know it. The Treasury certainly know it. And so it's really sad to see politicians who either don't know or are pretending not to know that business rates go through to landlords.

18:15And if you spend millions of pounds on a cutting business rates, that is mostly a handout to landlords. But that just feels like deeply unfair. Can't you bring in a rule which says you can't landlords can't put up their rent if business rates come down? Like, can't you legislate for that? For example, one of the units I've got up here, our business rates have gone up quite dramatically with the changes. If they came down and then the landlord said, we're going to put the rent up, we'll go, we'll stuff you, we'll move somewhere else, or our business just wouldn't be able to make money. But it's never that transparent, is it?

18:50Because you've probably got upward only rent reviews in your contract. The rent would go up anyway. You're not going to know how much it would have gone up if there hadn't been a change in business rates. It's all unenforceable. But yeah, pausing for a second. Simply abolishing business rates for pubs is a really bad idea. You're giving money to landlords. Don't do it. But there are other features of business rates that are problematic to tenants. The biggest one is that the market adjusts quickly, but business rates adjustment is really slow. And so if your business rates go up overnight, which often happens, that's not reducing your rent.

19:24One of the things that is quite striking is that governments have cut business rates to help sectors, but they have tend to make it tend to have made it explicit that they were temporary reductions, presumably to prevent the landlords from, you know, either depending on your point of view, rapaciously or sensibly, you know, essentially, you know, adjusting the rent in their favour, as it were. And so I assume you're not opposed to temporary support in a crisis via the business rate system. Your concern would be about permanent cuts in business rates. Yeah. A one-year business rate holiday for pubs, for example, is not going to go through into rents, but a permanent one will.

20:15There are better things that could be done that would actually help, like having more regular reviews of business rates. So you don't have this problem of business rates going up when the actual economic value of the property has fallen just because of the time lag between the valuation and the payment. So one of the things I was very struck by, there was quite a famous review by a bunch of economists, including John Van Rienen, who was one of this chancellor's early advisors of productivity, particularly productivity in France. This was about 10 years ago. And one of the things they showed is the point that you are actually making about VAT and the fact that, you know, when you get these cliff edges of taxes going up above a particular threshold, you create this deterrent for businesses to grow.

21:14So in France, there is a whole raft of benefits for being a small business, which means that they have an astonishing number of small businesses below a certain threshold and not as many perhaps bigger businesses as would be good for the productivity of the country. And so when you provide special help for small businesses, you've really got to be very careful that you're not creating disincentives to grow and become more productive and better employers. Yeah, I mean, the French system is mad. Anyone listening, if you Google John Van Rienen, R-E-E-N-A-N, and French firm chart, you will see this most astonishing chart showing how you have a large number of French firms up to 50 employees.

22:07And after that, the numbers just plummet because there are so many French rules that complicate stroke, punish the lives of businesses with 50 employees. So drawing lines around small businesses is always a very attractive thing for politicians to do. But it's a very dangerous thing that can do quite serious damage. Dan, I'm going to ask you to sit tight for a couple of minutes while we go to a quick break. Ready to soundtrack your summer? With Red Bull Summer All Day Play, you choose a playlist that fits your summer vibe the best. Are you a festival fanatic, a deep-end DJ, a road dog, or a trail mixer?

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23:59So as a person with a small business, can I just ask then if you, so as things stand, the costs in our business have gone up about 26 % when you look at all the different elements of employer in national insurance contributions, minimum wage rises because we employ lots of people who are young with business rates, with rents going up, with energy and everything else. it means that things are a lot tougher and the margins are a lot smaller. And we are now considering closing some of our bigger units, even though they're profit making. So how do you help? And that's going to mean potentially jobs being lost there.

24:36So how can you help small businesses at this point and not leave businesses like mine that are making money from deciding to bail from it all because it's just not worth it anymore? I live in Norfolk and hospitality is, I don't know about the major, but a very major employer here. And I talk to local businesses and people that run them. And the two biggest complaints are the rise in minimum wage and the rise in employer national insurance. And it seems to me, if people are complaining about two things and saying two things are the problem, maybe politicians should be thinking about those two things and not about other things.

25:14I can see why Andy Byrne maybe doesn't want to, but maybe he should. I mean, I've got a sort of different sort of concern, which is more of a long term concern. I mean, my view has always been that it's a really bad idea to set up a business to take advantage of of tax breaks. And obviously, tax and cost levels make businesses uncompetitive in a global market above a certain level. But I've broadly taken the view that, you know, taxes should not be fundamental to your decision about, you know, essentially whether to create a business. You obviously, as I say, need to have a government that keeps costs at a reasonable level.

26:04But, you know, special tax breaks, I'm just inherently anxious about. And I'm particularly anxious about a Britain whose economy really did change fairly fundamentally in 2007, 2008 after the financial crisis. Before that, I would say that we'd had about 20 years of a sort of ideology, which I think is the right kind of ideology, which is that if businesses run into difficulties, you create a sort of administration bankruptcy system that smooths the release of capital and allows those resources to go somewhere else to create new businesses. And equally, when people leave their jobs, you need a retraining system and a welfare system that basically helps those people into new employment and minimizes the very significant social costs that arise when a business goes bust.

27:06But I do fundamentally believe that an economy that thinks that all businesses have to be propped up under all circumstances, eventually, and I think we have moved more in that direction, becomes a low growth, low productivity, low wage economy. And I do think actually broadly part of the problem that we've had since 2000, 2007, 2008 is not I mean, people are going to scream at me when I imagine when they hear this. But I think not enough businesses have gone bust since then. And we would be in a better place if more businesses had gone bust and more of the talent from those businesses and more of the capital from those businesses had been redeployed to more productive businesses.

27:47So I immediately, you know, slightly recoil when I hear politicians making special pleading for particular sectors. It's different from saying we need support for growing new sectors. Of course, in a global competition, you know, you want to make sure that you're providing scale up finance to, you know, businesses that are going to be world beaters. And you can provably see that these have the potential to be world leading, highly productive firms. But propping up businesses that have over a period of years failed to increase their productivity and indeed have been going in the opposite direction.