Hospitality in the UK

Good afternoon from New Economy Brief, and welcome back from the Summer break.

Cafes, pubs, clubs, restaurants and hotels are at the heart of the places we live. But with as many as one in six at risk of closure amid mounting global and national pressures on supply chains and the cost of running a business, the sector is seriously struggling. Early business rates offerings from Andy Burnham show some promise for the sector, and have doubled optimism that the government can benefit hospitality, but going beyond piecemeal interventions will be needed.

There are more than  175,000 UK hospitality businesses, over 99% of which are small and medium-sized enterprises. These businesses are both socially and economically important in all our lives. Research from UKHospitality finds two thirds of people think hospitality plays an important role in their community, and the sector’s economic output was around £63bn in 2025. 

A cost of business crisis. But the sector itself isn’t in a healthy position; four hospitality businesses a day were closing down at the end of 2025 and earlier this year as many as one in six were at risk of closure. In a sector made up of everything from small businesses to global chains, these risks aren’t evenly felt; according to CLES, half of all food and drink hospitality turnover in the North East comes through the 25 most profitable companies.

According to NEF the sector faces major challenges in the form of “higher labour and supply costs, unfair taxation and falling household purchasing power” in recent decades. 

On the first of these, with one in five employees in the sector paid minimum wage, recent increases have had to be accounted for. So too have hikes to employer national insurance contributions alongside a lower threshold at which employers have to pay to start paying them. Hospitality businesses are also twice as likely as others to report business rates as a main concern.

Employees bearing the brunt. Keeping the wage bill low has a human cost. The sector employs over 2.6 million people, around 1 in 14 of all jobs, but pay is low and the conditions can be demanding. Over half of hospitality jobs are categorised as low paid – the worst of any UK sector. Research from the Poverty Alliance in Scotland finds that managing around fluctuating incomes, zero-hours contracts and seasonal work can be complex for individual workers. For example, some felt Universal Credit was too confusing or not worth applying for, leaving them exposed to the volatility in their work.

The new government’s in-tray. Whilst there are reports of a ‘Burnham bounce’ as confidence in a new Prime Minister boosted optimism in the sector, there are still major challenges the government needs to tackle head on. So far, announcements have focused mostly on tax reform – a cut to business rates for pubs, clubs and live music and then a Treasury review into pub and hotel business rates – alongside policies like the £2 bus fare cap aimed at supporting the whole high street.

Demand for hospitality wide support Whilst these interventions have been well received by those benefiting, they limit the types of business that can access support, so those who don’t qualify will still struggle. Restaurants, local shops, gyms and others have called for the support to be extended.

Across the sector there are also calls to go further through the ‘VAT’s the problem’ campaign calling for VAT on hospitality to be cut from 20% to 10%. The campaign argues that the UK is out of step with our European counterparts where hospitality VAT falls as low as 7% in Germany. More than 350,000 have signed a petition supporting the change. 

Over the summer the government’s Great British Summer Savings has cut VAT on kid’s meals and attractions to 5%, but the government has signalled that it is unlikely to support all the petition’s demands.

Elsewhere, the campaign’s recommendations have support from Reform. As part of divisive proposals for wider tax reform, halving hospitality VAT would be matched with savings from  welfare and reinstating the controversial two-child limit. Even aside from the moral question of whether it can be right to fund support for hospitality by plunging some hundreds of thousands of children back into poverty, IPPR has argued that the numbers just ‘don’t add up’. 

Others argue for much broader reform. For smaller, VAT-exempt businesses Alex Chapman, Head of Economic and Environmental Policy at NEF, argues that changes to business rates and VAT aren’t enough, and that we need to consider more radical ideas on property and land tax.

The future of hospitality in an era of heatwaves. There are more storms ahead for the sector after the hottest summer on record. Restaurant suppliers are reporting low yields and destroyed crops after successive heatwaves, and there are fears of growing volatility in food prices. And heatwaves themselves have an uneven impact on hospitality; whilst more traditional holiday destinations in the South West have reported higher visitor numbers, unsafe working temperatures have forced some businesses to close.

Global pressures and local businesses. Beyond the impact of heatwaves in the UK, global pressures on energy will also buffet the sector in the coming months. Hospitality businesses are four times more likely than other businesses to report energy prices as a main concern, and more likely to cut trading as a result. As NEF argues, energy price volatility isn’t new and is only likely to continue, so hospitality businesses will need support to navigate the shocks yet to come.

Meeting the scale of the problem. In the midst of the Covid-19 pandemic, the Conservative government published the first ever Hospitality Strategy five years ago, focusing on recovery and resilience as the pandemic restrictions eased. But since then there has been little dedicated policy agenda for the sector. A more joined-up approach might benefit not only the businesses themselves but also the government’s agenda around high streets and supporting young people into employment. 

The Federation for Small Business has produced a ‘sunshine list’ of priorities to boost tourism, which calls for interventions on everything from VAT to parking to place-making. A more systemic approach including transport, energy costs, the cost of premises and local partnerships is ambitious. But this may be the only way to build the infrastructure in which hospitality businesses can thrive as part of a diverse economy, offering good jobs and benefits for communities too.