Edinburgh's hospitality owners are keeping 18p in every pound. Here's what to do about the other 82.

Hospitality businesses in the UK hand over 82p in every pound of turnover to tax, according to analysis published by Startups.co.uk, making it the most heavily taxed sector in the British economy. That figure accounts for business rates, VAT at 20%, employer National Insurance contributions, and income tax obligations stacked on top of each other in a way that simply does not apply to most other industries. What's left, the 18p, has to cover wages, stock, rent, maintenance, and any profit worth speaking of. For most operators, it doesn't stretch.

Edinburgh feels this acutely. The city has one of the densest concentrations of hospitality businesses in Scotland, from Old Town restaurants to Leith wine bars to Lothian Road late-night venues, and the sector employs a significant share of the local workforce. According to the Scottish Beer and Pub Association, Scotland's licensed trade supports around 65,000 jobs. A structural tax burden that squeezes margins to near-zero doesn't just threaten individual businesses; it threatens those jobs and the communities built around them.

Business rates are the sharpest edge of the problem. The current system values commercial property at rates that bear little relation to trading reality, particularly post-pandemic, and hospitality properties are typically rated higher per square foot than many other business types. UK Hospitality, the trade body representing the sector, has consistently called for a fundamental reform of business rates, arguing that the current multiplier penalises high-street businesses disproportionately. Their 2024 submission to the UK Government cited business rates as the single biggest structural barrier to hospitality viability in Britain.

VAT is the second pressure point. The UK hospitality industry has lobbied hard for a reduced VAT rate since the temporary 5% cut introduced during the pandemic was withdrawn. Several European competitor countries, including Germany and France, operate reduced VAT rates for food and drink service. The argument from operators is simple: a lower VAT rate generates more economic activity, more employment, and ultimately more tax revenue than a 20% rate applied to a sector running on margins of 3 to 5%. The UK Treasury has not moved. The Scottish Government has no power to vary VAT; that lever sits firmly at Westminster.

For Edinburgh SME owners in hospitality, the practical response has to be three-pronged. First, get your business rates liability checked. The Scottish Assessors Association handles rateable valuations, and challenges are more common and more successful than most operators realise. Second, review your VAT accounting structure. If you run multiple revenue streams, such as retail, events, or merchandise alongside food and drink, there may be legitimate VAT planning available. Third, use every relief going. The Small Business Bonus Scheme in Scotland provides rates relief to eligible properties, and the thresholds are worth checking annually as your rateable value changes. According to the Scottish Government's business support guidance, some hospitality businesses are still leaving relief unclaimed simply because they haven't applied.