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New VAT cut provides food for thought

8th July 2020

NOTE: As announced at budget 2021, the government has:

  • extended the temporary reduced rate of VAT of 5% until 30 September 2021
  • prepare 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.

We review the Chancellor's Summer Economic Update's impact on Food and Drink and Leisure and Tourism.

The Chancellor announced a reduction on the rate of VAT to 5% from 15 July 2020 to 12 January 2021 (extended to 31 March 2021 in the Winter Economy Plan and then to 30 September 2021 in the 2021 Spring Budget) for the following supplies:

  • Food and non alcoholic drinks sold by restaurants, pubs, bars, cafés and similar premises
  • Supplies of accommodation
  • Admission to attractions, including zoos and cinemas

More detail is to follow from the government, but key issues for businesses which provide hospitality will be:

  • how the change will affect their pricing; and
  • how they will identify the sales which are subject to the reduced rate where they also sell alcohol, which will still be subject to VAT at 20%

The change in rate may affect cash flow where firms are paying 20% VAT on purchases before 15 July, but only collecting 5% VAT for sales after that date. Businesses need to review their cash flow and the timing of purchases.

On 9 July HMRC published detailed guidance on the application of the new reduced VAT rate for hospitality, holiday accommodation and attractions.

Key points are as follows

  • The reduction in the VAT rate will apply from 15 July 2020 to 31 March 2021 (as extended) inclusive.
  • Supplies which will benefit from the reduced rate are;
    • Food and non alcoholic drinks for on premises consumption
    • Hot takeaway food and hot takeaway non alcoholic beverages (but not cold takeaways such as ice creams, or cold beverages)
    • Sleeping accommodation in hotels etc, holiday accommodation, pitch fees and caravans and tents and associated facilities
    • Admissions to theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and similar cultural events and facilities. Many of these charges will already be exempt for VAT as a result of the cultural exemption.

If you would like to discuss this, please contact a member of our VAT team or your usual Bishop Fleming advisor in the first instance.

See also our article on Eat Out to Help Out in August.

Further reference - VAT leaflets affected by the VAT cut

Check out our Business after COVID-19: Transition Knowledge Hub for more guidance and advice on managing the pandemic.

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