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A £4bn cut in VAT has come into force, allowing firms in the food, drink and hospitality sectors to slash prices. Starbucks and McDonald’s are the latest firms to promise reductions after the chancellor ordered a temporary VAT cut from 20% to 5%.

The Treasury estimates households could save £160 a year on average, but not all firms will pass on the benefit.

Many companies are expected to use the windfall to shore up finances hit by the lockdown, rather than cut prices.

The VAT reduction will stay until 12 January next year, Rishi Sunak announced last week. It was part of a package of measures to help firms recover and get consumers spending.

VAT – Value Added Tax – is paid on everyday goods and services, but the tax is usually included in the price most consumers see.

On Tuesday, Starbucks said it had made the decision to pass on the full 15% discount on coffee served in company-operated stores. Other shops and venues with Starbucks licences will be left to pass on whatever reductions suit their business.

McDonald’s also said it had recommended that its franchisees cut prices on an array of products, including classics such as the Big Mac and Quarter Pounder. There will also be price cuts on coffee.

In the UK, the vast majority of the 1,350 McDonald’s outlets are owned and operated by individual business men and women, with each franchisee running an average of six restaurants each. But Paul Pomroy, McDonald’s chief executive for UK and Ireland, said that only four outlets across the UK were currently open for dine-in customers, with the remainder offering takeaway service.

Mr Pomroy said he hoped the price cuts being introduced were a sensible balance between boosting consumer demand and supporting franchisees in getting staff back to work.

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