Reduced VAT rate for hospitality - how it works

Earlier this year when the temporary 5% VAT rate was introduced for the tourism and hospitality industry, businesses in the sector scrambled to work out to what it applied.

As with many emergency measures, the scheme is often introduced before the fine details are released.

If you are applying the new 5% rate, now we are a few months in, it is useful to check you are applying it correctly and are planning for when the scheme ends.

Let us recap the rules

Food and Drink

From 15 July 2020 you have been able to charge 5% VAT (instead of 20%) on any food and non-alcoholic drinks consumed on premises and any hot takeaway food and non-alcoholic hot drinks consumed off premises.

HMRC considers delivery of a takeaway an ancillary service, so the 5% rate applies to this too.

However, if you pay a commission to those picking up and delivering the takeaway, this is not an ancillary service and so 20% VAT must be charged.

Catering

Third party supplies of catering for events do not qualify for the 5% rate, so 20% VAT needs to be charged. This extends to room service in hotels, as it is deemed as off premises.

It also applies to wedding packages as HMRC deem them a single supply, whether the catering is in-house or bought in, and 20% VAT must be charged.

It is good to review whether your supply would be classed as a package or just on site catering, as the reduced rate can make quite a difference.

Accommodation

The temporary 5% VAT rate also applies to most UK accommodation and deposits received relating to stays from 15 July 2020 onwards.

Watch out though. If a stay of more than 28 days is booked, the supply is exempt from VAT and you may need to consider partial-exemption calculations.

Attractions

Most attractions are covered by the 5% rate and it can also apply to season tickets purchased from 15 July 2020 onwards.

The bad news is sporting events are excluded from the 5% rate.

The good news is brewery tours can qualify provided the main purpose for the tour is to see the factory rather than to drink!

What other points should I consider?

Till Receipts

You need to make sure your cash tills, card machines and online platforms are updated with the new VAT rates. 
Till receipts need to show 5% VAT. If the receipt issued is still set up to show 20% VAT on the sale, then unfortunately you must pay 20% VAT to HMRC even if you are eligible for the cut.

Promotional offers

If you are selling a meal with a free beer, how should you account for VAT? 

The meal will now be eligible for the 5% VAT rate, but alcohol is still set at 20%. Does this mean you can charge 5% on the whole sale?

Even though you are advertising the beer for free, you are making a mixed sale. Two different VAT rates will need to be charged via an apportionment on the total value.

Eat out to help out

All subsidies received from this scheme are considered additional income and not a grant.

If VAT was not paid on the cash received, this will need to be corrected.

Cancellations

What happens if you retain a deposit after a customer cancellation? 

VAT will have been paid on the deposit at the rate applicable at the tax point (usually when payment was received). Even though there will be no supply, the VAT cannot be adjusted.

Do I have to pass the VAT cut onto my customers?

There is no requirement to pass the price cuts on to your customers, although lots of businesses are using this as a marketing opportunity.

When is it going to end?

Originally the temporary rate was due to end on 12 January 2021, but this has now been extended to 31 March 2021.

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.

Are there any VAT planning tips?

For past sales, if you paid 20% VAT on deposits received before 15 July relating to stays commencing during the reduced rate period, it is worth reviewing if you are able to amend these so that the 5% rate applies.

For future sales, currently HMRC has not got any plans to bring in anti-forestalling legislations, so if deposits are taken before 1 April 2021 then the 5% VAT rate can apply.

As we approach 31 March 2021, it will be worth brushing up on VAT tax points to ensure you invoice as much as possible at the reduced rate.

We are here to help

VAT can be complex, so if you would like to talk about how the temporary 5% rate affects your business, please get in touch. 

For more information, check out our Food & Drink Knowledgehub and our Business after Covid hub.