The temporary reduced VAT rate for the hospitality industry is just one of the support measures introduced by the government. Some businesses, particularly hotels and holiday parks, are taking advantage of special provisions that allow the VAT rate on payments and deposits, paid in advance of the change in VAT rate, to be adjusted from 20 per cent to 5 per cent, where the provision of the goods or services takes place during the period of the VAT reduction.
However, where a credit note has to be issued, the VAT law allows only a limited time for businesses to make these adjustments, and this deadline is fast approaching.
Hospitality businesses which are using the change in rate rules to account for 5 per cent VAT on income previously subject to 20 per cent VAT should take care to ensure that credit notes are issued according to the proper time limits.
The change in rate provisions allow the ‘tax point’ (ie the date on which VAT should be accounted for) to be moved when the rate of VAT is changed. For any hospitality businesses which have accounted for 20 per cent VAT on payments received in advance of a supply being made during the VAT rate-cut period (15 July 2020 to 12 January 2021), the VAT liability can be calculated by reference to the date on which the supply is made.
For example, if in January 2020 a consumer paid a deposit in relation to a short break to be taken in August 2020, 20 per cent VAT would have been accounted for on the deposit. However, due to the special ‘change in rate’ rules, the supplier could now override the original 20 per cent VAT paid and pay 5 per cent VAT to HMRC.
The VAT rules state that where the supplier of the goods or services issued a VAT invoice to the customer, a credit note needs to be issued in order to allow both the supplier and (where necessary) the recipient to make a VAT adjustment. However, the regulations implementing the change of VAT rate state that where a credit note is required, this credit note needs to be issued within 45 days of the date of the VAT rate change and needs to contain the wording ‘Credit Note – Change of VAT Rate’.
This means that businesses that have issued VAT invoices to customers and are looking to take advantage of the special rate provisions need to ensure that the credit note is issued before 29 August – otherwise HMRC may challenge the validity of the credit note and a VAT adjustment might not be permitted.
Businesses which are unsure whether their supplies qualify for the reduced rate should seek advice as soon as possible – otherwise they could miss out.