Temporary reduced rate of VAT for hospitality, holiday accommodation and attractions

In the budget the Chancellor announced an extension to the reduced rate of VAT for hospitality, holiday accommodation and attractions. The reduced VAT rate of 5% will now apply to supplies made between 15 July 2020 and 30 September 2021. For supplies made between 1 October 2021 to 31 March 2022 a VAT rate of 12.5% will apply.

What services are covered by the reduced rates

Hospitality

The reduced rate applies to:

• Food and non-alcoholic beverages, both hot and cold, for consumption on a business’s own premises, for example, a restaurant, café or pub.

• Hot takeaway food and hot takeaway non-alcoholic drinks.

Supplies of food and drink for consumption off-premises as part of a supply of catering services, e.g. function or event catering such as wedding receptions and parties, are not covered.

The VAT treatment of cold food and drinks is different when they are not consumed on-premises so it is important to know what is your premises. It includes retail outlets and any areas containing chairs and tables for the use of their customers. For stalls in stadiums, amusement parks or similar pay-entry venue the premises will be the stall and any facilities adjacent to the stall for use by its customers.

Hotel and holiday accommodation

The reduced rate applies to:

• supplies of sleeping accommodation in a hotel or similar establishments, e.g. Airbnb.
• certain supplies of holiday accommodation
• caravan pitches and associated facilities
• tent pitches or camping facilities

The provision of accommodation in a room in a hotel for the purpose of catering will benefit from the reduced rates but a supply of a wedding package including use of rooms for a ceremony, wedding breakfast and evening party remains a single standard-rated supply.

Admission to certain attractions

Charges for admission to certain attractions where the supplies are currently standard rated, will benefit from the reduced rate. This includes:

The reduced rate applies to incidental goods or services supplied with admission, e.g. incidental supplies of food and drink supplied as part of a brewery tour.

If a charge for admission is currently exempt that will take precedence and the reduced rates will not apply.

Admission to sporting events does not qualify for the reduced rates.

Accounting for VAT

When is a supply made

It is important to know when a supply is made as this will determine which VAT rate applies, this is called the tax point.

The basic tax point for goods is when they are passed to or made available to the customer and for services it is when the service is performed or completed. If these events occur when the reduced rate is in force the reduced rate will apply.

However if a payment is received or a VAT invoice is issued before the basic tax point this will also create a tax point and VAT on the invoice value or deposit should be declared at the rate in force at that time. This means VAT should be paid at the reduced rate on deposits received while the reduced rate is in force even if the goods or services are supplied when a higher rate of VAT applies.

There are special rules for deposits received before 15 July 2020 where the goods or services are supplied when a lower rate of VAT applies. Businesses can choose to account for VAT on the deposit at the relevant reduced rate.

Where VAT invoices have been issued showing VAT at 20% they must be credited and reissued showing VAT at the reduced rate if an adjustment is to be made.

Whether a business has to pass the reduction on to their customer will depend on the contractual terms.

There are also special rules where services are provided both before and after a rate change it may be possible to apportion the service and apply the lower rate to the element performed after the rate reduction.

How to calculate the VAT element of an inclusive value

To calculate the VAT element of an inclusive charge at 5% divide the total by 21. Where the VAT rate is 12.5% divide the total by nine.

Flat Rate Scheme

The Flat Rate percentages will change as the VAT rates change. At present the Flat Rate percentages are currently 4.5% for catering businesses including restaurants, 0% for hotels and accommodation businesses and 1% for pubs rising to 8.5%, 5.5% and 4%.

These rates are currently low and it may be worth considering using this scheme temporarily.

The scheme is only available for businesses with a net taxable income of £150,000 or less.