How much should value added tax be for the hospitality industry?

Value added tax for the hospitality industry: a controversial topic, at the latest since Germany reduced the rate from 19% to 7% during the Covid-19 pandemic. While supporters think the reduced VAT is a justified and appropriate measure, critics see it as an economic risk and call for a return to the regular tax rate.

Value added tax: will it stay at 7%?

What’s it all about?

  • Comparison of the value added tax for the hospitality industry in EU countries
  • Possible effects of a value added tax increase on the hospitality industry
  • Situation in Germany: 19% or 7% value added tax?
  • Demands for a permanent reduction in VAT

A look at our European neighbours shows that the tax rates for VAT in the hospitality industry are regulated differently. But unlike Germany, 23 European Union (EU) states do not distinguish for tax purposes between wholesale food, food delivery, takeaway and in-restaurant dining. Martin Behle, Chief HoReCa Officer of METRO AG, already sees a fundamental problem here: ‘When I order take-out from a restaurant, a VAT rate of 7% applies. But if I want to sit down in the pub, it will be 19%’ [source]. Guido Zöllick, the President of the hotel and restaurant association Dehoga, has also come to the same conclusion: ‘The 7% value added tax, which created a level playing field for all the hospitality options, is long past due and must stay. Permanently‘ [source].

What VAT rate do EU Member States impose on the hospitality industry?

While Germany charged its standard rate of 19% for the hospitality industry pre-COVID, the federal government temporarily lowered this to 7% due to the pandemic. The interim solution will apply until the end of 2023 and, according to the law, will be lifted at the beginning of 2024. Numerous voices, especially from the hospitality industry, are rising up against the return to the standard rate, while critics are arguing for its return. The question is: which model is better? A comparison of VAT rates in EU Member States provides ideas.

What is value added tax?

Value added tax (VAT) is a consumption tax levied on almost all goods and services bought and sold for use or consumption within the EU. Although there are general rules on VAT that apply throughout the EU, their application is not completely uniform across EU countries.

Each country sets a standard rate that applies to most sales. This must not be under 15%. Countries may apply one or two reduced rates of not lower than 5% to the sale of certain goods and the provision of certain services.

Which EU countries have a reduced VAT rate?

A large number of EU Member States (currently 23) have a reduced VAT rate for the hospitality industry, including countries such as Spain, Italy and Greece. Accordingly, they are implementing exactly what restaurateurs in Germany are asking for. Restaurateur Kerstin Rapp-Schwan insists: ‘Even if VAT wasn’t reduced until the pandemic, people have been calling for a reduced VAT rate in the sector for over 20 years ‘. [source]

The smallest difference between the reduced rate for the hospitality industry and the standard rate is 10% in France, Portugal, Austria, Cyprus, Romania, Slovakia and Finland. Luxembourg has the lowest rate, with 3% VAT for the hospitality industry compared to the standard rate of 16%, followed by Hungary with 5% (standard rate: 27%) and currently Germany with 7% (standard rate: 19%). However, there are also Member States that do not distinguish between the standard rate and the VAT rate for the hospitality industry. These include: Denmark, Malta, Latvia and Estonia.

19% or 7% value added tax: what will Germany decide to do?

If Germany returns to the standard rate, it will be in the minority of EU Member States that do not grant a reduced tax rate to the hospitality industry. The tendency in the EU is clearly to provide relief to the industry via a reduced tax rate. There are many reasons for this.
Let us consider voices from Germany calling for a permanent reduction of the tax rate. First and foremost is the hotel and restaurant association Dehoga, which expects around 12,000 businesses to close in the event of a VAT increase for the hospitality industry. This assumption is based on a survey by the Dehoga Bundesverband on the consequences of a VAT increase on food in the hospitality industry, in which 9,600 hospitality businesses from all over Germany took part. To underline the urgency of maintaining the reduced tax rate, Dehoga Bundesverband allowed restaurateurs to have their say in videos. This is also the case with Axel Bode, owner of the Witwenball restaurant in Hamburg, and Michael Steiger, operator of several Irish pubs in Villingen, Schwenningen and Tuttlingen. Bode asserts: ‘Not only do we pay value added tax, which absolutely has to stay at 7% for food and actually for drinks too. We also pay business tax, income tax and much more; plus we’re the ones who ensure that the city centres remain vibrant’. Steiger also emphasises the importance of hospitality businesses for people, towns and villages: ‘We are the glue that holds our society together’.

Will prices rise if the VAT rate increases?

If the planned return to the regular tax rate takes place at the beginning of 2024, food will be taxed at an additional 12%. According to Martin Behle, a lot of restaurateurs would have to pass on these price increases to their guests: ‘At the small Italian restaurant around the corner, this will mean about €10 more for a meal for a family of four. And that’s just for the food ‘. [source] As a result, Behle suspects, the total number of restaurant visits will decline. If fewer guests come in the long run, many hospitality businesses will not be able to survive. This in turn will have an impact on social life, especially in the city centres. In addition, some businesses are currently being asked to repay the federal government's corona emergency aid, which puts  additional pressure on them. [source

How does the value added tax for the hospitality industry impact inflation?

Steffen Greubel, CEO of METRO AG, explains why METRO is in favour of reduced VAT for the hospitality industry: ‘Logically, we have a vested interest in our customers doing good business. But it is much more than just that: it's about our country, the future of our city centres, our social life outside our own homes’. [see article on]

Tax rates are very important for the economy. Food inflation has peaked in Germany in recent months. Reduced tax rates increase the risk of further fuelling inflation. But the tax increase for the hospitality industry also risks driving up inflation. This is the assumption of the Food, Beverages and Catering trade union, which assumes that a tax increase at the beginning of 2024 will further fuel inflation. [source] If businesses have to close, they will no longer bring in tax revenue for the state, warns SPD Member of Parliament Daniel Rinkert. [source] Behle adds: ‘If 10% of businesses close, then 10% of tax revenue is lost. If we then look at the entire value chain, from the farmers to the restaurant, and at the resulting increase in unemployment, the economic costs are enormous ‘. [source]

Can the return to the regular tax rate be justified?

However, some leading economists think the return to the standard rate is justified or even necessary. After all, the COVID-19 pandemic that gave rise to the interim situation is now over. ‘The tax reduction was a measure taken during the pandemic to prop up the hospitality industry, which was hit hard by the crisis’, Clemens Fuest, President of the Munich-based Ifo Institute, told Handelsblatt. ‘The pandemic is long over, so the relief effort should end ‘.
The President of the German Institute for Economic Research (DIW), Marcel Fratzscher, also sees no need to implement the temporary VAT reduction permanently: " During the Corona pandemic, the hospitality industry was hit particularly hard by the closures, which justified the VAT reduction. But in the current state, there is no good reason why the hospitality industry should benefit from a permanent reduction in VAT, while other industries such as hotels or retail industry shops do not ‘. [source]
Some politicians are also critical of the reduced VAT rate. ‘It will be difficult to further prioritise these additional funds that are in the billions’, the Tourism Coordinator for the German Government Dieter Janecek told Der Spiegel.

What VAT rate is appropriate is a question that politicians in Germany must now address. More and more voices are coming out to influence the federal government’s decision.

‘The politicians in Berlin are unfamiliar with the facts on the ground. Economists also live in their own data-driven bubble`, says Martin Behle, Chief HoReCa Officer of METRO AG and emphasises: The debate always revolves around the stereotype of the successful pub in the city centre where purchasing power is high. But the classic country inn, the small village tavern, is dying. The tax increase will only fan the flames. It will be the final nail in the coffin ‘. [source] Behle makes it clear: ‘As long as there is no clear political consensus on the continuation of the 7% VAT and the trend is more towards 19%, we as an industry will not be  quiet’.

Value added tax: will it stay at 7%?

Petition against value added tax for the hospitality industry

And the industry is making itself heard: with statements and videos in social networks, interviews in magazines and even petitions. To emphasise the urgency of maintaining the reduced VAT, the Dehoga Bundesverband is calling for signatures on the petition ‘No tax increase: 7% VAT on food in the hospitality industry must stay!’. JRE Deutschland, an association of chefs in the upscale hospitality industry, has also launched a petition entitled ‘Together for the preservation of the hospitality industry: stop the value added tax increase!’

📜 Petition

The VAT reduction is much more than a tax cut: it is a sign of appreciation and a ray of hope for the future. An article by METRO AG.

👉 METRO Politics: Fair taxation on food and beverages - Gastronomy needs the promised 7 percent

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