Businesses operating in the hospitality, travel and tourism sectors will have welcomed the introduction of the temporary reduction in the VAT rate that has applied to certain supplies of services since last summer. However, with effect from 1 October 2021, the 5 per cent VAT rate that currently applies to these services is due to increase to 12.5 per cent.
Consequently, businesses enjoying the benefits of the reduced rate will need to take action before the increase to ensure that they continue to meet their compliance obligations.
On 15 July 2020 the VAT rate for certain supplies of hospitality, hotel accommodation and admission to attractions was temporarily cut from 20 per cent to 5 per cent. Due to continued restrictions resulting from the coronavirus pandemic, the Chancellor announced in the 2021 Budget that the 5 per cent rate would be extended until 30 September 2021, to be replaced on 1 October 2021 by a 12.5 per cent rate, before returning to 20 per cent on 1 April 2022.
Time is now running out for businesses to make the necessary business changes to ensure that they apply the new 12.5% VAT rate correctly when the change takes effect on 1 October.
What supplies does the reduced rate apply to?
In summary, the temporary reduced rate of VAT applies as set out below.
Hotels and travel businesses
- For the holiday sector, the reduced rate of VAT applies to supplies of sleeping accommodation in hotels, bed and breakfast accommodation, campsites and caravan sites.
- For tour operators, the reduced rate of VAT does not apply to the margin calculated under the Tour Operators Margin Scheme (TOMS), so margin scheme supplies remain taxable at either the standard rate or zero-rate. However, in-house and bought-in supplies, which are excluded from TOMS, are subject to the temporary reduced rate.
- The temporary reduced rate of VAT also applies to admission to shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and similar cultural events and facilities. However, the reduced rate does not apply to admissions to sporting events. Also, not for profit organisations and public bodies running attractions and events that qualify for the ‘cultural services’ VAT exemption must apply the exemption, rather than the reduced rate.
- Organisations that charge admission fees to view online live performances may also be eligible for the reduced rate, but fees charged to foreign customers may be outside the scope of UK VAT and foreign VAT consequences may need to be considered.
Restaurants, pubs, bars, cafés and hot takeaway food outlets
The reduced rate of VAT applies to food and non-alcoholic drinks sold for on premises consumption in restaurants, pubs, bars, and cafes. It also applies to hot takeaway food and hot takeaway non-alcoholic beverages for consumption off the premises. However, there are some restrictions:
- the guidance states that catering contracts are not eligible for the reduced rate;
- cold drinks, such as canned soft drinks, sold as a takeaway item are not covered by the reduced rate; and
- HMRC's guidance states that obligatory service charges (as opposed to tips, which remain outside the scope of VAT) are subject to VAT at the standard rate.
Which VAT rate do I apply?
The key point is to identify the correct ‘tax point’ for the supply, as this dictates when a supply is treated as being made and therefore the VAT rate that should be applied.
Generally speaking, under the normal tax point rules, the ‘tax point’ is the earlier of:
- The issue of a VAT invoice (please note that there are particular requirements that must be fulfilled for an invoice to qualify as a VAT invoice);
- Receipt of payment; or
- The date on which the supply is completed.
When the VAT rate increases on 1 October, businesses will have the option of applying the normal VAT tax point rules or applying a separate set of ‘special provisions’. These special provisions allow businesses to treat a supply of services as taking place when it is completed, rather than when a VAT invoice is issued, or a payment made.
Where a business has received payment, or issued a VAT invoice in the normal course of business before 1 October 2021, but the service is not provided until on or after 1 October, the 5 per cent VAT rate will still apply to the payments received or the amounts invoiced. However, any further/balancing payments received, or additional invoices issued, in relation to the same supply between 1 October 2021 and 31 March 2022 will be subject to the 12.5 per cent rate.
Practical points to consider
Aside from understanding which VAT rate to apply, businesses will also need to consider how to administer the different VAT rates in their IT systems. As a starting point, businesses will likely need to set up a new tax code for the 12.5 per cent VAT rate in accounting software. Additional updates may be required to systems that feed into accounting software, such as EPOS or booking systems
You may also want to consider whether it would be possible to take action to crystallise a lower rate of VAT on supplies. Although HMRC have not introduced any specific anti-avoidance rules in relation to the temporary reduced rate, they have stated that they will challenge any practice that they consider to be abusive. Therefore, if you decide to change your normal business practices, you will need to carefully consider how this will be viewed by HMRC, as they are likely to challenge any action taken that attempts to unfairly take advantage of the lower VAT rate.
Although the temporary reduced VAT rate has been welcomed by the hospitality and travel sectors, it doesn’t come without complexities. As the rate will be increasing to 12.5 per cent with effect from 1 October, businesses only have a short window to make sure the necessary updates are made to ensure continued VAT compliance.
If you have a business affected by the VAT rate increase or require more information, please get in contact with Philip Munn.