In his mini budget on 8 July, the Chancellor announced a temporary reduction of VAT chargeable on certain sales in the hospitality and leisure industries. The reduced rate of 5% (instead of the standard rate of 20%) will apply from 15 July 2020 to 12 January 2021. Businesses providing services in these sectors should be considering the wider potential opportunities that this can offer.
What does the reduction cover?
Food and drink:
– On-site consumption: All sales of food and drink will be subject to the reduced VAT rate, apart from alcoholic drinks, which are still subject to 20% VAT
– Takeaway sales: If it is hot food or a hot drink being sold, and it is not alcoholic, it is subject to 5% VAT
– Hotels, guest houses etc – including holiday accommodation, caravan & tent pitch fees (and associated facilities)
– Shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions, similar cultural events and facilities
Note – admission to some facilities is already exempt from VAT under the cultural exemption, mainly relevant to public bodies and not-for-profit organisations. This exemption takes precedence.
Practical points to consider
Affected businesses will need to:
– Identify the affected income streams and adjust VAT accounting records accordingly
– Decide whether to pass some/all of the saving on to consumers at reduced prices, or retain the benefit themselves
– Adjust accounting software to track sales at the reduced rate of VAT
The relevant income streams may be easy to determine for providers in the hotel, holiday and attractions categories. However, they could require more detailed consideration for suppliers of food and drink who may already have many different products that are standard-rated for different reasons and which will therefore not all qualify for the new reduced rate.
The effective date (“time of supply”) of transactions for VAT purposes will need to be considered.
Where a payment has already been received before 15 July for a supply made after that date (for example accommodation bookings), VAT will already have been accounted for at 20% on the payment received under the normal VAT rules.
In this situation the business can use special provisions to adjust the VAT on the prepayment to the reduced 5% rate. This is optional and would require a manual adjustment, but would provide the business with a VAT saving although if a VAT invoice had already been issued, a VAT credit note would need to be issued.
The same applies when the reduced rate is coming to an end. The reduced VAT will need to be accounted for at 5% on any prepayments received before the reduced rate ends on 12 January 2021, even if the booking is for after that date. This is a great incentive to encourage advance booking, so for example, providers of holiday accommodation and attractions/events can effectively offer a 12.5% advance booking discount to customers at no cost to the business.
Those using the flat rate scheme
If you use the flat rate scheme to simplify your VAT calculations, you should be aware that certain percentages have been reduced in line with the introduction of the temporary reduced rate of VAT.
The most relevant categories will be ‘catering services including restaurants and takeaways’ at 12.5%, ‘hotel or accommodation’ at 10.5% and ‘pubs’ at 6.5%.
How we can help
If you are one of the businesses that the new VAT temporary reduction will impact, additional care will now be needed in the preparation of VAT returns, especially in the periods spanning the start and end dates.
If you think your business qualifies for the reduced rate and you require support with your VAT accounting, or you wish to understand more about the changes, please get in touch with our specialist team.
To read the full government guidance, please click here.
This information is correct as of 14 July 2020. This blog is for general guidance only. Recipients should not act upon any of the information provided without seeking specific professional advice tailored to your circumstances, requirements or needs. Please contact PM+M before making any decisions based on any matters relating to this blog.