VAT, Hospitality & Surveying: The 20% Sitting at Every Table
- Jun 23
- 5 min read
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What is this blog about?
When you go out to eat and look at a menu, the price you see is rarely the number that the business gets to keep. In a brilliant two-part series on his Substack, Notes on a Napkin, Dan O’Regan, the Bristol restaurateur behind BANK and Lapin, breaks down 'the 20% sitting at every table', offering valuable insights into how Value Added Tax (VAT) shapes the commercial reality.
The hospitality sector requires the property sector to operate - pubs, hotels and bars usually require a physical space to operate in, whether it is freehold or leasehold. This, in turn, affects rents, investment yields and freehold values. Keep running with this train of thought and you will see how the whole economy is interlinked...
Understanding the implications of VAT on a variety of sectors and the wider economy (not just the property & construction sectors) is essential for RICS APC and AssocRICS candidates and qualified surveyors. It helps us to better advise our clients and understand what shapes markets and market behaviour. Remember, money spent, saved or taxed at one point in the economy will find it's way to another in good time! We will look at some of the key takeaways in Dan's article for RICS APC and AssocRICS candidates and qualified surveyors, before linking to the article in full on Dan's Substack.
1. The Flawed 'Conduit' Model & The Profits Method
The Hospitality Perspective: VAT is theoretically supposed to be a neutral consumption tax; businesses collect it from customers, reclaim the VAT they paid on inputs (like raw materials) and remit the net difference to HMRC.
However, Dan explains that hospitality breaks this model. A restaurant's two largest inputs are labour (which carries no VAT to reclaim) and ingredients (which are largely zero-rated, meaning there is no input credit to offset). As a result, a restaurant collects 20% on gross revenue but has almost nothing to deduct, reducing margins to a low 3% to 5%.
The Surveyor's Perspective: This is a relevant point for valuers using the profits method of valuation to bear in mind. When valuing trade-related properties, such as hotels, pubs or restaurants, you must look past the 'abundance' of a gross turnover figure.
For example, a hospitality business with a (seemingly high?) gross turnover of £1,000,000 is most likely to be operating on an incredibly tight margin once VAT is removed from the equation. This could be a net profit of £40,000 - £50,000 and a net profit margin of just 3-5%.
To accurately determine Fair Maintainable Turnover (FMT) and Fair Maintainable Operating Profit (FMOP), you must understand the unique tax burdens of the hospitality trade.
What something looks like on face value might not be the commercial reality. This is also a very good reason to only value or advise on instructions where you are adequately skilled, experienced and competent.
2. The £90,000 'Cliff Edge' (Hospitality vs. Construction)
The Hospitality Perspective: The UK’s VAT registration threshold sits at £90,000. Dan highlights what economists call 'bunching', where rational, small-scale operators actively restrict their turnover (by shortening hours or closing for summer) just to stay under the threshold. Crossing it means either increasing prices by 20% (highly undesirable to most customers who cannot reclaim the VAT element) or absorbing the substantial margin impact (highly undesirable to lose 20% of turnover overnight).
The Surveyor's Perspective: Interestingly, HMRC's research reveals that this 'bunching' behaviour is most pronounced in two specific sectors; hospitality and construction.
For Quantity Surveying & Construction pathway candidates, it is interesting to note that some small-scale subcontractors often employ the exact same rational behaviour, declining work packages or limiting work to stay under the VAT threshold. As a Quantity Surveyor, understanding these micro-economic incentives is vital for anticipating supply chain risks, navigating subcontractor availability and analysing tender pricing strategies.
3. When Tax Dictates Asset Management & Design
The Hospitality Perspective: VAT in the UK can be hard to understand with many technical nuances. A cold takeaway sausage roll is zero-rated, but if it's kept warm in a heated cabinet or eaten at a table, it triggers 20% VAT. A takeaway hot coffee is taxed at 20%, but a takeaway iced coffee is zero-rated.
Because of this, operational decisions, such as whether a bakery installs a warming unit or how an EPOS system is coded, are often driven by tax strategy.
The Surveyor's Perspective: Property does not exist in a vacuum; a building's layout, equipment, specification and ultimate viability are directly tied to the tax legislation governing the tenant's day-to-day operations. As surveyors (and potentially asset managers), we must understand how these granular rules impact a tenant’s covenant strength and ability to pay the contracted rent.
The Surveyor's Takeaway
To be a competent surveyor, you have to understand the reality of the businesses occupying the spaces you value, build or manage. Dan's article provides the perfect real-world case study for how taxation can directly shape commercial viability of a business.
To read the full, detailed breakdown of the mechanics of VAT, and to explore Part Two on how the UK compares to Europe, we highly recommend reading Dan's original post (see below link to Parts 1 and 2).
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N.b. Nothing in this article constitutes legal, professional or financial advice.