The Government has introduced a temporary reduction in VAT to 5% on certain supplies within the hospitality and leisure industry. Running until 12 January 2021, the aim is to help the sector to bounce back and recover from the period during which it was unable to trade.
But, with social distancing measures still in place, to what extent will the reduction in the rate of VAT aid the recovery of the hospitality and leisure sector? And which types of businesses can benefit from the reduced rate of VAT?
Which businesses can benefit from the reduced VAT rate?
The reduced VAT rate applies to most, but not all, types of businesses in the hospitality and leisure sector. These are:
1. Hotels and other accommodation
The reduction applies to accommodation ranging from hotels, inns and guest houses through to campsites and holiday parks.
The British Holiday and Home Parks Association has released guidance on how these rules may apply for park businesses. This covers all the practical aspects, from till changes to pricing policies, websites and menus, and what to say to customers.
2. Cafes, pubs and restaurants
The temporary 5% rate of VAT applies to hot and cold food and non-alcoholic beverages for consumption on the premises.
We have had a number of queries on the practical points and many clients have asked if they need to change the VAT percentage on their tills. The answer is ‘yes’, and if you provide a customer with a VAT receipt it must show the correct rate of VAT in force at the time.
Some clients have mentioned that, where supplies have all been standard rated in the past, they have never shown any differentiation between food and drink sales. I would encourage business owners to change this as it is important to monitor sales.
Two different rates of VAT now apply to drinks: 5% on non-alcoholic and the standard 20% on alcohol. It is important to separate these two different types of sales on the basis that the correct rate of VAT needs to be accounted for and shown on receipts where given.
3. Takeaway food and drink
There has been a longstanding debate of what is classed as hot or not when deciding which takeaway foods are sold at standard or zero rated VAT. The 5% rate of VAT extends to hot, but not cold, takeaway food and beverages, so any establishments selling takeaways will need to be able to differentiate between the two.
Outside catering companies are specifically excluded from the temporary measure and remain standard VAT rated, much to the dismay of those affected. Sadly, they have suffered a huge loss of revenue due to the cancellations of public gathering, including weddings.
4. Leisure attractions
There has been some confusion over which leisure attractions can benefit from the VAT reduction. Admission charges are the important criteria here; unless there is an admission charge any other payment is not encompassed by these rules. The reduction in VAT applies to those leisure providers such as amusement parks, zoos, cinemas, exhibitions, fairs and theatres. Cultural attractions have been listed but not yet defined.
We have had several enquiries as to whether the concession extends to experience and activity days and on the face of it, it does not. HMRC deems these activities to remain at 20% standard rated unless they are a small ancillary supply as part of the reduced rate supply, such as a small feature offered alongside hotel accommodation.
When should the reduced VAT rate apply?
Our clients have also asked when they should apply the reduced rate VAT from an invoice timing perspective. This comes down to what is known as the tax point, for VAT purposes. The timing is determined by when a payment is received or a VAT notice (an invoice) is issued. Your accountant can explain this to you and help you to get the timing right.
This can be a bit more complex when it comes to accommodation, which is often booked many months ahead, compared to food and drink, which is generally not paid for in advance. Some of our hotel and holiday park clients have asked if the VAT reduction will apply to bookings that were made before 15 July for stays after that date. In this case, under a special provision, the VAT treatment of the supply can be amended to reduce the rate of VAT. This also means a deposit paid can be amended so long as a credit note is issued and the VAT invoice is re-raised. Certain terms and conditions apply, so speak to your accountant about any queries.
Should a business reduce its prices?
Businesses will need to make some adjustments to their invoicing procedures to take advantage of the reduced VAT rate. They will need to determine whether what they are selling has been stated to be inclusive of VAT or whether the normal price is quoted plus VAT, which is reflected in the invoice.
If, for example, your menu quotes a price that is inclusive of VAT then the 5% reduction need not make any difference to what you charge during this temporary period. So, if a fixed menu is £30 per head inclusive of VAT prior to 15 July 2020 and a restauranteur keeps the menu price the same, the business will benefit from the VAT reduction. In this case, instead of paying £5 VAT, the amount payable to HMRC drops from £5 to £1.43 and the business owner keeps the £3.57 towards the business’ recovery.
If the consumer is to benefit, the menu price would reduce to £26.25 and the business earns the same as under the standard rated rules whilst the consumer saves £3.75.
So the key decision for a VAT inclusive quote is whether a restaurant should lower its prices or keep them the same to assist the business.
Where prices are quoted plus VAT the 5% rate of VAT must be applied to the invoice.
The Eat Out to Help Out Scheme should encourage consumers to spend money in the hospitality industry but we will see how much this helps the sector towards recovery.
The Flat Rate VAT scheme and other considerations
Leisure and hospitality businesses will also need to take into account a continuous supply of services for VAT purposes. One example is the annual invoicing of a seasonal pitch. In this situation, the appropriate adjustment can be made to the months during which the reduced VAT rate applies.
Some businesses that have applied for the flat rate scheme will not be impacted as the reduced rate has been adjusted accordingly, from 12.5% to 4.5%.
Unless HMRC introduces anti-forestalling measures, the 5% VAT rate will apply to payments received and VAT invoices issued prior to 12 January 2021. This should be the case even if the supply of the meal or accommodation does not take place until after 12 January, when we revert to the standard rate of 20%.
So, how far will these measures assist the hospitality and leisure industry as business owners try to bounce back from the significant impact of lockdown? Well the proof, as they say, will be in the pudding.
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