What if VAT goes up again? Here’s what hospitality needs to know.

Imagine walking into Tesco tomorrow and paying 20% more for your milk and bread. That’s the nuclear option the Government could pull if they decided to change the scope of VAT. Unlikely? Maybe. Impossible? No.

When VAT jumped from 17.5% to 20% in 2011, operators felt it overnight. Back then, I wasn’t old enough to understand the mechanics behind VAT, but I do remember my parents being panicked at the thought of prices going up on just about everything except the bare essentials. Fast forward to today, and I what-if-vat-goes-up-again-here’s-what-hospitality-needs-to-knownow very much understand the impact of VAT on consumers - but more importantly, on hospitality businesses and the cashflow constraints that follow.

Labour have said they “won’t increase the rate of standard VAT,” but what they haven’t said is that they won’t change the scope of VAT - which goods and services sit at 0%, 5%, or 20%. Commentators expect that any move here would mean shrinking the number of items at reduced or zero rates. In practice, that could mean moving some 5% items up to 20%, or pushing zero-rated or exempt goods into 5% or 20%.

The easiest wins would be either ambiguous items already on the line. Flapjacks vs cereal bars, smoothies vs juices, bakery products that change VAT status depending on whether they’re hot, cold, or eaten in. Not forgetting luxury-type zero-rated goods such as caviar, certain supplements, or “health drinks” that can be framed as lifestyle luxuries rather than essentials. These would generate extra revenue without much political fallout.

But if the Government really wanted to raise serious money, they’d target staples like bread, milk, butter, tea, and coffee. Around 11 million loaves of bread are sold every day in the UK - that’s over 4 billion loaves a year. The bakery economy (excluding cakes) is worth roughly £5.7bn per year, while dairy and dairy alternatives, milk and cream account for another £5.6bn annually. Together, those two categories alone could generate around £2bn in extra VAT for HMRC.

On the face of it, some hospitality operators could benefit. Restaurants, hotels, bars, and cafés that are already charging 20% VAT could reclaim more on ingredients that are currently zero-rated, lowering their net VAT bill. But the sting in the tail is this: suppliers will almost certainly raise their net prices to protect their margins, knowing that everyday consumers can’t reclaim VAT. That means higher input costs for operators, not just higher prices at the tills.

From a consumer perspective, paying an extra 20% for a block of butter or a pint of milk would be brutal. And when the weekly shop costs more, the first thing people cut back on is discretionary spending, foregoing meals out, takeaway coffees, and nights away. That’s where hospitality feels the pinch twice over. Operators who sell predominantly zero-rated goods such as bakeries, cake shops, and sandwich shops would be hit hardest. Many of these businesses currently reclaim VAT and even rely on quarterly (or monthly) rebates from HMRC to support cashflow. A scope change would flip that model on its head.

We’ve seen a glorious rise in independent cake shops, cafés, and sandwich shops in recent years. But if Rachel Reeves decides to “tidy up” VAT on staples and British essentials, that could lead to emptier high streets as independents buckle under new economic pressures. The lesson is simple: don’t assume zero-rated will always mean zero. Model the “what ifs” now, so you’re not left scrambling when the rules change.