VAT Reduction for Hospitality, Holiday Accommodation and Attractions

To encourage spending and boost the economy the government has announced a temporary cut in the VAT rate to 5% on supplies relating to hospitality, accommodation and admission to certain attractions.

The temporary reduced rate will apply to supplies that are made between 15 July 2020 and 12 January 2021. The supplies affected are as follows:

• food and non-alcoholic drinks sold for consumption on the business premises, for example, in restaurants, cafes and pubs
• hot takeaway food and hot takeaway non-alcoholic drinks
• sleeping accommodation in a hotel or similar establishment, holiday accommodation, caravan pitches, tent pitches or camping facilities
• admission fees to concerts, theatres, museums, fairs, amusement parks, circuses, cinemas, zoos, exhibitions and similar cultural events and facilities. However, if the fee charged for admission is currently exempt that will take precedence and the supplies will not qualify for the reduced rate.

These changes are being brought in as an urgent response to the coronavirus (COVID-19) pandemic to support businesses severely affected by forced closures and social distancing measures. However, the new rules will cause some transitional headaches for businesses that have to change their VAT accounting.

Accounting for supplies that straddle the temporary reduced rate

In the situation where payment or a deposit has been received before 15 July 2020, but the goods or services will be supplied after 15 July 2020, the business can charge VAT at 5% on goods removed or services performed between 15 July 2020 and 12 January 2021.

It is likely that some customers will expect the business to apply the reduced VAT rate to the deposit, but it is the decision of the business whether to amend the VAT rate.  If a business chooses to amend the VAT rate and has already issued an invoice showing the 20% rate of VAT, this must be corrected by issuing a credit note and issuing a fresh invoice showing the 5% rate.

The purpose of the VAT reduction is to support businesses, but the contract that they have in place with their customer might require them to pass on any VAT savings to them. This could result in some negotiating to share any VAT savings. Ideally a VAT inclusive price will have been agreed up front so that the full saving can be retained by the business.

Supplies made before 15 July 2020 with invoice issued at a later date

In this situation it is necessary to consider the basic tax point rules:

• Goods – this is the date that the goods are sent or taken away by the customer or made available to the customer
• Services – this is the date that the service is performed or completed.

However, if an actual tax point is created this will override the basic tax point. This occurs when:

• If, before the basic tax point, the business issues a VAT invoice or receives payment for the goods or service. The tax point here is the date of the VAT invoice or the date when payment is received, whichever happens first.
• If the business issues a VAT invoice up to 14 days after the basic tax point. The tax point in this case is the date the invoice is issued. Therefore, the new rate will apply if an invoice is issued on or after 15 July 2020 and the service or goods were supplied up to 14 days before 15 July 2020.  Otherwise the standard rate of 20% will apply.

VAT schemes

There are a number of VAT schemes used by businesses. The impact of the temporary VAT reduction is broadly as follows:

• Flat rate scheme – HMRC have changed the flat rates for the sectors affected by the change. The current rates can be found here: https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay
• Cash accounting – this scheme enables businesses to account for VAT when they receive payment. The general tax point rules apply and therefore VAT will only be due at the new rate for supplies made on or after 15 July 2020
• Retail scheme – the reduced rate will apply to takings received on or after 15 July 2020.  However, it may be necessary to apportion takings and apply the standard rate and the reduced rate where the change spans a VAT period. Till systems should be updated to account for the reduced VAT rate for any relevant supplies
• Annual accounting – HMRC will not change any instalment unless a business expects their VAT liability to increase or decrease significantly over the course of the year
• Payment on account – the rate change will not affect payments on account, but when a VAT liability is expected to decrease by 20% or more the business can write to HMRC and request reduced payments.

VAT on the ‘Eat Out to Help Out’ vouchers

Any restaurants, cafes and pubs that enrol for the VAT ‘Eat Out to Help Out’ scheme must account for VAT on the full consideration as usual. VAT must be accounted on the full price, including the amount that will be refunded to the business by the government.

The Tour Operators Margin Scheme

If you are a business that buys in and resells travel, accommodation and certain other services, and you act in your own name, you may operate the Tour Operators Margin Scheme to simplify your calculations.

Further information about how the introduction of the temporary reduced rate of VAT will affect your calculations can be found in Tour Operators Margin Scheme (VAT Notice 709/5).

Administration

After the VAT rate changes, it is important that all businesses impacted by the new rules update their accounting software. For information on how to change the VAT rate in Xero, QuickBooks and Sage please click on the following link: –

https://jsca.co.uk/wp-content/uploads/2020/07/New-Tax-Codes.pdf

The information in this blog provides only an overview of HMRC guidance and legislation in force at the date of publication and no action should be taken without consulting the detailed HMRC guidance and legislation or seeking professional advice.  Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this blog can be accepted by the firm.

Photo by chuttersnap on Unsplash