The last 18 months has been an incredibly challenging period for all UK businesses in the hospitality sector with forced closures, staff shortages and supply issues. However, the temporary reduced VAT rate of 5%, introduced by the government as a COVID-19 support measure from 15 July 2020, has certainly helped to lessen the blow.
From 1 October 2021 to 31 March 2022, the temporary reduced rate will be increased from 5% to 12.5% and will then end so that affected supplies revert to 20% VAT from 1 April 2022.
VAT registered businesses in the hospitality industry will need to ensure that their tills and accounting systems are set up correctly to apply the increased rate of 12.5% from 1 October 2021 and then 20% from 1 April 2022.
There are a number of practical issues to consider and opportunities available to businesses to maximise the benefit of the temporary reduced VAT rates between now and the end of March 2022. Some of these apply to both suppliers and customers so it is also relevant to businesses outside of the hospitality industry.
As a reminder of those supplies to which the temporary reduced rate applies:
- Food and non-alcoholic beverages sold for on-premises consumption.
- Hot takeaway food and hot takeaway non-alcoholic beverages.
- Sleeping accommodation in hotels and similar establishments, holiday accommodation, pitch fees for caravans and tents and associated facilities.
- Admissions to tourist attractions such as theatres, museums, cinemas, historic houses, fairs, amusement parks and similar cultural events and facilities.
Calculating VAT at 12.5%
To calculate the VAT element of a VAT inclusive supply that is subject to 12.5% VAT, the VAT fraction to apply is 1/9.
For example, the supply of a hotel room with a VAT inclusive price of £90 has a VAT element as follows:
£90 x 1/9 = £10
VAT savings for suppliers
There are opportunities for suppliers to maximise the benefit of the temporary reduced rates by bringing forward the “tax point” of the supply so that VAT is accounted for at 5% (or 12.5% if on or after 1 October 2021) rather than 20%.
This can be done in one of two ways:
- Receive part or full payment during the reduced rate period for a supply which will take place after the rate increase.
For example, a caravan park is offering pitch fees for the 2022 summer season when the VAT rate will be 20%. If the caravan park receives a deposit and/or full payment before 1 October 2021, they can account for VAT on the amount received at 5%. If the caravan park receives a deposit and/or full payment before 1 April 2022, they can account for VAT on the amount received at 12.5%. Any balancing payment received after 31 March 2022 will be subject to VAT at 20%.
The caravan park may consider offering an early payment discount to the customer to encourage them to pay before 31 March 2022. This will provide a cash saving for the customer and a VAT saving and cash flow benefit for the caravan park.
- Issue a valid VAT invoice on or before 31 March 2022.
For example, the owner of a furnished holiday let could issue a valid VAT invoice to their customer on 30 September 2021 for a stay which is due to take place in May 2022. The issue of the invoice creates a tax point for VAT of 30 September 2021, when the VAT rate for holiday accommodation is 5%. Even if the customer does not pay all or some of the invoice until after 31 March 2022, the VAT rate can remain at 5%.
VAT savings for customers
For customers who cannot fully reclaim input tax, it may be beneficial to prepay for some hospitality supplies before 1 October 2021, thereby creating a tax point for VAT when the 5% or 12.5% rates still apply.
This will only benefit the customer where supplies are advertised on a VAT exclusive basis so that the VAT added to the bill is at the temporary reduced rates, otherwise the VAT saving will be retained by the supplier.
VAT Flat Rate Scheme (FRS)
When the temporary reduced rate was introduced in July 2020, the flat rate percentages for many hospitality related categories were reduced. This led to many businesses leaving the FRS, particularly those that had a lot of 5% VAT sales and relatively few sales at 20%.
These businesses may now want to consider re-joining the scheme in October or April as the FRS rates will be adjusted as follows from 1 October:
- Catering services including restaurants and takeaways – 4.5% will increase to 8.5%.
- Hotel or accommodation – 0% will increase to 5.5%.
- Pubs – 1% will increase to 4%.
The rates will then increase again to their pre-July 2020 levels from 1 April 2022.
If you will be affected by the change in VAT rate from 1 October 2021 and would like to discuss any practical issues or opportunities to obtain a VAT benefit, then please get in touch with your usual contact at RRL.