French bistros gobble tax break meant for diners

Hefty VAT cut has not led to cheaper meals for customers

Tourists hoping to eat a little more cheaply in France after a big cut in VAT on restaurant meals may be disappointed. Only just over half of restaurants have passed on the tax break to their customers. Among smaller, independent restaurants and cafes, the results are more disappointing. According to the government survey, only a third outside the big chains have reduced some or all of their prices to take account of the cut in VAT from 19.6 per cent to 5.5 per cent that took effect on 1 July.

The government, which gave up €2.4bn (£2bn) in tax revenue to try to boost the flagging French restaurant industry, has declared the results to be "encouraging". But this word is said to hide deep frustration, and even anger, among some ministers and in the Elysée Palace. The president of the largest French association of restaurateurs and hoteliers, Christine Pujol, warned her members yesterday that what came down could easily go up again. If restaurant owners do not play the game, she warned, the government might decide to restore the high tax rate on sit-down meals.

Some restaurateurs say that they have ploughed the extra cash into wage increases or extra staff, rather than price cuts. Others say that they needed the money simply to keep their heads above water. Didier, a restaurant owner in the 17th arrondissement of Paris, said: "The customers are accusing me – in a friendly way so far – of stealing their taxes but I had no choice. If I passed on the cuts, I would have to fire staff or go out of business."

The French restaurant industry has been campaigning for seven years to have sit-down meals taxed at the lowest national VAT rate, just like take-away meals. The change was refused by the EU until President Nicolas Sarkozy persuaded Brussels last year that a tax cut was urgently needed to boost the flagging trade of French restaurants during the recession.

Under French law it was not possible to force restaurants to pass on the tax cuts. Each restaurant is free to set its own prices. The industry undertook, however, to cut prices on at least seven popular items on menus and to increase wages or staffing levels. A survey by the tourism ministry found that price cuts had been introduced by 90 per cent of restaurants in big chains such as Hippopotamus. They were much less common in traditional, privately-owned family restaurants or in small restaurant groups. Some privately-owned restaurants had opposed the VAT cut from the beginning, complaining it would mostly benefit down-market chains and increase, rather than ease, the unfair competition faced by "genuine" French restaurants.

The Minister for Economic Recovery, Patrick Devedjian, warned however, that restaurants had a moral duty to pass on the cuts, unless they were in severe economic difficulties. "The President kept his promise [by making the tax cuts]. In return the industry promised to cut prices and hire more staff," he said. "This promise must also be kept if the industry wants to retain its credibility."