‘Dwarfed by other costs’ – Why cutting business rates for pubs won’t save the sector

Andy Burnham has unveiled his long-awaited support for the UK’s struggling pubs, but the hospitality industry is contending with far more pressures than just business rates

Andy Burnham’s pledge to cut business rates for pubs, clubs and music venues is expected to save each venue more than £1,000 next year in a move that comes with a £100m price tag. The tax break was welcomed by trade bodies and pub groups alike. 

So why did shares in some of the UK’s biggest pub firms slump following the news? Marston’s, which runs more than 1,300 pubs across the country, shed more than five per cent of its value on Thursday, while Young’s dropped more than four per cent. 

JD Wetherspoon, the UK’s best known pub chain, and Fuller’s, which runs 185 pubs in the UK, opened three and one per cent lower. 

As welcome as a £100m tax cut was, this tepid investor reaction reveals the scale of the headwinds faced by the UK’s pub sector. The £1,000-per-pub tax break amounts to about £25 per week which, while welcome, “hardly moves the needle,” said Alex Pugh, an analyst at Freetrade.

“Any rate savings will be easily dwarfed by labour costs, higher employer NI contributions, sticky input prices, and energy bills well above historical norms.

“Combined with belt-tightening consumers who are cutting back on discretionary nights out, business rate tweaks alone aren’t enough to re-rate the sector,” he added. 

Applying the government’s estimates to the 793 pubs managed by Wetherspoon, the pub chain will save £872,300 in business rates next year. This leaves £41m in business rates, according to the tax paid by the pub chain last year, on top of £167m in alcohol duty, £411m in VAT and £154m in employment taxes. 

Mitchells & Butlers paid £79m in business rates last year, meaning a £1,100 cut at each of its 1,145 pubs would have still left it with a more-than £77m bill. Shares in this pub firm fell five per cent on Thursday, though this was after it posted flat sales and warned of “challenging weather conditions”.

Burnham: ‘The cavalry is coming’

Wetherspoon posted its own sombre notice to investors on Wednesday, warning on profit for the fourth time this year. “Welcome as the cut in business rates is,” these updates reveal the wider challenges faced by the sector, said Russ Mould, investment director at AJ Bell.

The tax cut will not change pubs’ “long-term competitive position, as they wrestle with the challenge posed by promotional prices at the big supermarkets, or what is still soggy consumer confidence, which could sag further if oil prices stay elevated and they quickly filter through to costs at the petrol pump,” he added.

Wetherspoon chairman Tim Martin has long campaigned for the government to rebalance a tax system which he claims allows supermarkets to sell alcohol at a far cheaper rate than pubs, undercutting their business. Pubs have lost 50 per cent of their trade to grocers in the last 25 years, Martin claims.

Defending the policy, Burnham insisted that this was a “first step” in his bid to renew local communities. Pubs “need to know that the cavalry is coming,” the Prime Minister said.

Burnham’s attempt to rehabilitate Labour’s image in the eyes of pub managers is well judged, following Rachel Reeves’ own business rates reform mishaps. 

Prior to the Budget, the Treasury hailed proposed changes to business rates from a “slab” system to a “slice-based” framework as “pro-growth”. Changes announced on 26 November were seen as being anything but. 

At the Budget, Reeves announced that the hospitality industry and retailers would be given a 5p cut to their business rates bill. But as the calculations were published, pubs and restaurants found that their tax bills would rise by as much as 224 per cent. 

Pubs call for VAT cut

Some bosses called the changes “shit” and claimed they were “lied to”; Labour MPs were banned from pubs; opposition parties leaped on the miscommunication by announcing a string of new policies to appeal to voters; Reeves eventually announced a £300m package to allow pubs to get a 15 per cent discount on the tax. 

Lurking in the North, the new pint-loving Prime Minister has wanted to show that his government – favouring “business-friendly socialism” – has very different feelings about pubs and small businesses. Ousting Reeves wasn’t enough. 

Burnham may not have shaken off the residual issues from Reeves’ Treasury. The Prime Minister re-appointed Dan Tomlinson, a respected former think tanker, as his tax minister. He was, after all, the minister who oversaw the initial changes to business rates.

His latest pubs policy, shared around weeks before he entered Number 10, is already coming unstuck. The Institute for Fiscal Studies’ Helen Miller, the top think tanker analysing fiscal policymaking brought either by the Left or the Right, said the latest changes were “not a welcome development”. 

Because business rates fall on land owners rather than business owners, pub owners may not benefit from lower costs as rents may be increased to offset losses, according to Miller. 

Pub landlords are already calling for more. Following the business rates pledge, Martin ramped up the pressure on Burnham to commit to cutting VAT on hospitality businesses from 20 to 10 per cent. 

Burnham has indicated in the past that he supports cutting VAT, telling a nighttime industries conference earlier this year that he “would argue” for the measure – comments the UK’s pub owners are unlikely to forget.