Reduced VAT rate for hospitality - is it as simple as it seems?

On 8 July, The Chancellor announced that VAT registered businesses would be able to apply a temporary 5% reduced rate of VAT to certain supplies relating to hospitality, hotels, holiday accommodation, and admissions to certain attractions. The rate will apply from 15 July 2020 until 12 January 2021. However, there are some key points you need to consider when applying it, and as always the devil is in the detail.

Hospitality

The reduced rate of VAT will apply to food and non-alcoholic beverages, both served on the premises and on hot takeaway food and hot non-alcoholic drinks. Where cold takeaway food was previously zero rated, the zero rating will continue to apply. VAT must continue to be charged at 20% on any sales of alcohol. The key things you need to consider:

• Do you need to make changes to you point of sale system to allow the VAT rate change to be reflected?
• Do you currently gather sufficient information at the point of sale to be able to split sales between food which is taxable at 5% and alcohol which is taxable at 20%? (e.g. for ‘beer and burger’ deals the reduced rate of 5% only applies to the burger)
• How will your systems cope with the interaction of the reduced rate of VAT and the ‘Eat Out Help Out’ scheme?

Hotels and holiday accommodation

The reduced rate can be applied to:

• Sleeping accommodation provided at hotels, inns, boarding houses etc.
• Holiday accommodation
• Seasonal pitches for caravans
• Pitches for tents and camping facilities

Where you have supplies which will straddle the change in VAT rate, care will need to be given to ensure that the correct VAT rate is accounted for. There are special provisions around accounting for VAT on these types of supplies. You may also need to review your contracts, agreements and terms and conditions in terms of whether you are obliged to pass on the rate change to your customers. If so, you may need to provide credit notes for deposits already paid.

Admissions to certain attractions

Admissions to a range of venues, including museums, theaters, circuses, fairs, zoos, concerts, and exhibitions will also qualify for the reduced rate of VAT. Please note that where you currently apply the cultural exemption to these admission charges, the supplies will remain exempt.

Flat Rate Scheme

It is worth noting that where you use the Flat Rate Scheme, certain percentages have been reduced in line with this temporary change:

• Catering services (including restaurants and takeaways) rate reduced from 12.5% to 4.5%
• Hotel/holiday accommodation rate reduced from 10% to 0%
• Pubs rate reduced from 6.5% to 1%

Don't get caught out

It is clear that there are a lot of complexities that could catch unsuspecting businesses out. For instance, the current guidance suggests that when a customer purchases a cold soft drink, crisps or confectionery, the reduced rate of VAT would apply to these items providing they were consumed on the premises. However, if they were to be consumed off the premises the 20% rate of VAT would apply. Businesses will also need to ensure that they have the appropriate processes systems in place to ensure that VAT is accounted for correctly. For further information, please get in touch.

How can we help?

We’re here to help, so please just get in touch if you need any assistance with VAT. We can support with a range of issues including:

• Determining whether your supply benefits from the rate cut
• Assisting with systems changes over where necessary
• Advising on apportionment for mixed supplies (such as ‘beer and burger’ type deals)
• Advising in relation to supplies which straddle the rate change, e.g. hotel/holiday accommodation where the same individual is staying from 13-20 July
• Reviewing VAT returns for the period of the change where it may be easy to make rate errors