Getting the timing right with the new VAT rate change

The reduction in the VAT rate between 15 July 2020 and 12 January 2021 (extended to 31 March 2021 in the Winter Economy Plan and further updated to 31 March 2022 in the Spring Budget) for supplies of hospitality, accommodation and admission to attractions has highlighted the importance of determining the time of a supply for VAT purposes, and in particular the special rules which apply when there is a change in the VAT rate.

As announced at budget 2021, the government has:

• extended the temporary reduced rate of VAT of 5% until 30 September 2021
• prepared for a new rate of 12.5% from 1 October 2021 to 31 March 2022

The supplies to which the temporary reduced rates will apply remain the same.

Most of the supplies covered by the reduction in the VAT rate are supplies of services and their basic tax point will be the date when the supply takes place (e.g.when the meal is eaten, the hotel room slept in or the attraction visited).

However, the time of supply can be brought forward if a payment is made in advance of the supply taking place. If a deposit is paid, for example when reserving holiday accommodation, then the tax point will be the date when payment is received.

Special rules

Special rules come into play when the VAT rate changes, which allow the taxpayer to choose which of these tax points to use to determine the amount of VAT due.

So a payment received on 1 April 2020 for a hotel room which will be occupied on 1 August 2020 will be subject to VAT at 20%, unless the taxpayer elects to apply the special tax point rules and move the tax point to 1 August, when the VAT rate will be 5%.

If a VAT invoice was issued charging VAT at 20%, then a credit note can be issued to correct the VAT rate to 5% provided that this is done within 45 days of the rate change (i.e. in this case by 29 August 2020).

This change of rate election also means that accommodation for summer 2021, when the VAT rate will have reverted to 20%, will be subject to VAT at 5% to the extent that payment is received between 15 July 2020 and 31 March 2021 (as extended). In that case the taxpayer will elect to use the earlier tax point.