An introduction to VAT
Value Added Tax, (VAT) is the tax you have to pay when you buy goods or services.
The standard rate of VAT in the UK is 20%, with about half the items households spend money on subject to this rate, but following Rishi Sunak’s announcements this is changing for many as the hospitality and tourism sector receive a huge reduction in the VAT rate to just 5% for 6 months
VAT rate reduced
Rishi Sunak announced in his mini budget on 8th July that VAT would be substantially reduced for the hospitality and tourism sector, slashed from 20% to just 5%. Sunak hopes that this reduction will secure businesses and jobs in this industry.As with all Government announcements the measures are not without exclusions, so the team at MJB Avanti have put together this handy guide to the new temporary VAT rate.
HMRC state that the reduction applies to;
“Organisations that make supplies of hospitality, hotel and holiday accommodation and admission to certain attractions, and their advisers.”
The VAT reduction went live from 15th July 2020 and will run until 12th January 2021.
Is it a compulsory reduction?
No, while the Government have reduced the VAT rate for businesses ion these sectors, it is optional for these business owners to pass the reduction to their customers. The Government hope that businesses will pass it on to boost spending by consumers, but it remains the choice of each individual business whether to reflect this reduction in their prices.
Bigger firms such as Nando’s and Pret A Manger have already confirmed that they will pass on the VAT cut to their customers, with Nando’s pledging to pass “100% of the benefit” to their customers.
Either way, it is your responsibility to ensure that your VAT obligations to HMRC are met.
What is included?
The 5% reduction will apply to;
- Attraction admission fees
- Sleeping accommodation in hotels or similar establishments, holiday accommodation, pitch fees for caravans and tents, and associated facilities
- Food whether eaten in or taken away from restaurants, cafes, pubs, bars and other similar venues.
- Non-alcoholic drinks from restaurants, cafes, pubs, bars and other similar venues.
Further information on the VAT treatment of catering and takeaway food is available here
Click here for further information on the VAT treatment of admission charges to attractions.
Further information on the VAT treatment of hotels and holiday accommodation can be found here
What is not included?
It is important to note that the sale of alcoholic drinks is excluded from the reduction, and the VAT rate for these remains at 20%.
Suppliers to this sector will not benefit from the reduced VAT rate, the reduction is designed to apply to the retail end of the supply chain only and as such wholesale supplies of food and drink remain subject to the 20% VAT rate.
Wedding packages currently remain at the 20% VAT rate, but where there is a separate supply. e.g outside catering suppliers, this element may benefit from the 5% VAT rate. Guidelines on this remain blurry, and we await further updates.
Room hire for the purpose of conferencing remains subject to 20% VAT, but where a room is hired and lunch supplied, the reduced rate will apply.
The VAT Notice 700, section 30.1 offers the following guidance on sudden changes to the VAT rate.
“The same provisions apply when the tax liability of particular goods and services changes. It’s possible that other procedures might be necessary but details of these would be given at the time of any change.
When a VAT rate or liability is changed, it may have to be introduced at short notice. HMRC recommends that your accounting system – whether or not you use a computer – is designed to allow you to adjust to the change without difficulty.”
Individual circumstances and the advised steps;
The reduction to 5% VAT applies to accommodation, but if you have received a deposit against a stay before the rate was reduced and the stay follows the date of reduction – the business owner can use their discretion whether or not to apply the 5% VAT rate.
While most sporting events remain a no go under current restrictions it is important to note that sporting events have been listed as an exclusion to the 5% VAT cut.
While this list is not exhaustive, ‘attractions’ is deemed under the new measures to include;
- Shows, cinemas and theatres
- Circuses and fairs
- Amusement Parks
- Museums and exhibitions
Some tourist attractions will already be exempt from VAT due to cultural exemption, and where this applies, the exemption supersedes the 5% VAT rate.
Flat Rate Scheme
The guidance also confirms that the FRS percentage for qualifying businesses will be adjusted temporarily.
HMRC have finally updated their flat rate percentages for the businesses mostly affected by the Coronavirus pandemic across the hospitality and tourism sector.
Reduced rates will apply from 15 July 2020 to 12 January 2021 as follows;
- Catering services including restaurants and takeaways rate changed from 12.5% to 4.5%
- Hotel or holiday accommodation from 10% to 0%
- Pubs from 6.5% to 1%
The guidance about VAT on admission charges helpfully gives two examples of supplies where more than one rate of VAT applies, usually 20% and 5%.
One of the examples confirms the admission fee for a brewery tour will be subject to 5% VAT, even if the fee includes some food and drink as part of the tour – ie the food and drink is ‘incidental’ to the tour. But if eating and drinking was the main priority, it would all be subject to 20% VAT.
Another example of mixed supplies would be a pub serving a meal deal offer e.g. fish ‘n’ chips and a pint for one price. In this example the single price would need to be apportioned between the element which is subject to 20% VAT (the alcoholic drink) and the element subject to 5% VAT (the food). Apportionments may be based on multiple factors but the result must be reasonable and fair.
HMRCs stance on this is;
“It is the responsibility of each taxpayer to demonstrate that its supplies are eligible for the temporary reduced rate.”
Importantly, this acknowledges that there will be grey areas but as long as a ‘sensible and reasonable approach’ is adopted to each practical situation, HMRC will hopefully accept the calculations made by business owners to work out how much VAT is due.
What are software and EPOS providers doing to help?
As Gold certified Xero partners, MJB Avanti recommend Xero accounting software and are pleased to hear Xero have confirmed that if you use their software all you need to do is select the appropriate VAT rate for the affected supply as set out by HMRC for the commencement date -15th July.
Xero have provided guidelines on changing the VAT rate in your Xero file
Surprisingly, it would seem that EPOS providers didn’t update users with instructions for updating or overriding the preset VAT rates, so if you use an electronic payment facility, it would be wise to check if this has been updated buy the provider or if you have to manually update your VAT rate to reflect the change.
You should confirm if the supplies you make are affected by the temporary reduction to the VAT rate.
If so, you need to consider changes to;
- Your pricing
- Terms and conditions
- Your VAT accounting processes to ensure correct reporting
Further Advice Needed?
If you have a query relating to your VAT, and MJB Avanti are authorised to act on your behalf, please contact us for guidance, 01473 558866.
If you need help with your VAT reporting, are you aware that MJB Avanti can offer a comprehensive bookkeeping service or a ‘simple’ VAT check to give you reassurance that your VAT is correct before submitting to HMRC.
Alternatively, for general enquiries about anything in these guidelines or your VAT position under the new VAT rate you can also call HMRC 0300 2003700 or submit an online query using the VAT general enquiry form – replies to enquiry forms can take up to 15 days.