Reduced VAT rate increases from 1 October 2021

As announced in the March 2021 Budget, the reduced rate of VAT of 5% for hospitality and tourism increases to 12.5% from 1 October 2021, until 31 March 2022. 

The supplies to which the temporary reduced rates apply remain the same, including catering, holiday accommodation and admissions to attractions.

It will be important for businesses affected to charge the correct rate of VAT from 1 October, ensuring any software adjustments for tills, card machines and online platforms are updated with the new VAT rate. 

Till receipts need to show the reduced rate. 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.

Normally, the VAT rate applicable will be that when the service is performed, or when completed where the service is for a longer period than a day. But this date can change to the earlier of an advance payment being made or the issue of a VAT invoice.

Food and Drink

Businesses can charge the reduced rate of 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 reduced rate applies to this too.

However, where commission is paid 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 reduced 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.

A review may be needed as to whether a supply would be classed as a package or just on site catering, as the reduced rate can make quite a difference.

Accommodation

The reduced rate also applies to most UK accommodation and deposits received relating to stays from 15 July 2020 onwards.

However, be aware of stays where more than 28 days are booked, as the supply is exempt from VAT and you may need to consider partial-exemption calculations.

Where a booking is taken with a deposit or full payment before 1 October 2021, this creates an actual VAT point (in the case of a deposit, only to the extent of that amount and not for the full value) even if the stay is due to take place on or after 1 October 2021.

Attractions

Most attractions are covered by the reduced 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 reduced rate.

Brewery tours can qualify provided the main purpose for the tour is to see the factory rather than to drink!

Promotional offers

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

The meal is eligible for the reduced rate, but alcohol is still set at 20%. Does this mean you can charge the reduced rate 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.

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 businesses have used this as a marketing opportunity.

As you approach 31 March 2022, it will be worth brushing up on VAT tax points to ensure you invoice as much as possible at the reduced rate.

Further information

Further information is contained in:

• Catering, takeaway food (VAT Notice 709/1)
• Hotels and holiday accommodation (VAT Notice 709/3)

We are here to help

VAT can be complex, so if you would like to talk about how the reduced rate affects your business, please get in touch with a member of our VAT team. 

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