The Chancellor’s Summer Economic Statement delivered on 8 July included various measures to support hospitality and leisure businesses during the coronavirus emergency. They included a targeted temporary VAT cut for supplies of hospitality, hotel accommodation and admission to attractions.
From 15 July 2020 to 12 January 2021 a wide range of supplies, which are normally subject to VAT at the standard rate of 20 per cent, will be eligible for the reduced VAT rate of 5 per cent.
HMRC has now published legislation and detailed guidance on how the reduced rate will apply to businesses operating in these sectors. Restaurants and similar food outlets will also have to consider the VAT implications of the government’s ‘Eat Out to Help Out’ discount scheme which will apply to certain eat- in meals during August 2020.
The guidance highlights important points for the various types of businesses that are eligible to apply the reduced rate to their supplies and avail themselves of the discount scheme. However, adding a reduced rate and a discount scheme into these already complex areas of VAT has raised many questions which have not been directly addressed by HMRC. Businesses should carefully consider the impact of these measures on their activities. Operators will have to work out which rate to apply to supplies that straddle the rate change dates at the start and end of the period and the overall effect of the changes on their accounting systems.
Restaurants, pubs, bars, cafes and hot takeaway food outlets
The 5 per cent reduced rate of VAT will apply to food and non-alcoholic drinks sold for on premises consumption in restaurants, pubs, bars, and cafés. It will also apply to hot takeaway food and hot takeaway non-alcoholic beverages for consumption off the premises.
However, there are some areas which are likely to cause confusion for the hot food sector.
- It appears that cold drinks, such as canned soft drinks, sold for takeaway will not be covered by the reduced rate. Takeaway businesses will need to identify sales of these items separately.
- The guidance states that catering contracts, which appears to refer to buffets or meals for meetings and private events held off premises, will not be eligible for the reduced rate and remain subject to VAT at 20 per cent.
- HMRC has reduced the percentages used in the Flat Rate Scheme in line with the temporarily reduced rate. The existing rates for the following categories have been updated as follows:
- Catering services, including restaurants and takeaways = revised to 4.5% (from 12.5%)
- Hotel or accommodation = revised to 0% (from 10.5%)
- Pubs = revised to 1% (was 6.5%)
- HMRC has not so far created any new categories, e.g. to differentiate between outlets that serve only food and non-alcoholic drinks (eligible for the reduced rate) and those that also serve alcohol, which is still subject to VAT at 20 per cent.
The ‘Eat Out to Help Out’ scheme
The ‘Eat Out to Help Out’ discount scheme has been introduced by the government to encourage people to return to eating out in restaurants, cafés, pubs, and similar food service establishments. Restaurants and cafes within hotels, tourist attractions and holiday parks are also included, as are workplace and school canteens and dining rooms at members clubs. However, the scheme does not apply to takeaway food or catering for private parties, events or functions.
Diners will be entitled to a 50 per cent discount of up to £10 per head on any eat-in meal (including on non-alcoholic drinks) purchased at a participating venue on a Monday, Tuesday or Wednesday during August 2020. Service charges and alcoholic drinks are not included in the amount eligible for the discount.
Businesses will be reimbursed by the government through an online scheme, which opens for registration on 13 July. More information is available on the gov.uk website. HMRC will open its online portal for reimbursement claims on 7 August, and says it will pay eligible claims within 5 working days. Businesses can submit claims on a weekly basis.
HMRC says that the maximum discount value of £10 per diner is inclusive of VAT and that businesses must still pay VAT based on the full amount of the customer’s bills. Its guidance includes examples of bills which indicate that the supplier will be required to account for VAT (at potentially different VAT rates) on the full, pre-discount value of the customer's bill, and not on the discounted amount that they will receive in payment from the customer.
Pubs and restaurants will need to carefully consider how to reconfigure their till systems to ensure that they account for VAT correctly. The VAT position is likely to be even more complex for those who offer multibuy deals including meals and alcohol, and larger pubs who must perform partial exemption calculations as a result of VAT exempt income from gaming machines.
Admissions to attractions
The temporary reduced rate will apply to admission to shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and similar cultural events and facilities. HMRC’s latest guidance adds botanical gardens, planetariums and studio and factory tours as examples of attractions to which the reduced VAT rate for admission fees may apply.
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.
Where an admission fee includes other items, such as samples of drinks as part of a tour of a brewery or distillery, or a brochure included in the admission fee for an exhibition, HMRC says the whole supply is eligible for the reduced rate provided the additional items are incidental to the admission.
Organisations that charge admission fees to view an online live performance may also be eligible for the reduced rate and reminds promoters that fees charged to non-EU customers may be outside the scope of VAT altogether.
Venues and attractions that include cafes or restaurants may also sign up for the government’s Eat In To Help Out discount scheme.
Hotels and travel businesses
For the travel sector, the reduced rate applies to supplies of sleeping accommodation in hotels, B&Bs, campsites and caravan sites. Hotel restaurants are also included in the Eat Out to Help Out discount scheme but room service and catering for private functions are not.
Hotels and holiday businesses who have already accounted for VAT at 20 per cent on advance bookings for stays between 15 July 2020 to 12 January 2021 have the option of applying the 5 per cent rate and issuing a credit note to the customer to refund the overpaid VAT.
For tour operators, the temporary reduced rate for supplies of hotel accommodation, catering and shows and similar attractions will have an effect on their Tour Operators Margin Scheme (TOMS) calculation.
The reduced rate does not apply to the margin calculated under TOMS, so margin scheme supplies remain taxable at either standard rate or zero-rate. However, in house supplies, which are excluded from TOMS will be subject to the temporary reduced rate. Bought in supplies, e.g. from hotels, shows and tourist attractions will also be subject to the reduced rate. This is not recoverable as input tax and it will reduce the cost applied to the margin, thereby increasing the margin and the amount of VAT payable to HMRC. HMRC has updated the Market value and Cost based calculation formulae in its public notice to take account of this.
If you would like assistance with applying the temporary reduced rate of VAT in your hospitality or leisure business, please contact Audrey Fearing.