VAT – Temporary reduced rating, and the return to normal for hospitality, holiday accommodation and attractions

It did not take long for the effects of lockdown to be felt in the hospitality sector, and while some food and beverage businesses were resourceful in establishing new working patterns to accommodate fewer covers, or develop a takeaway offering, the same could not be said of the hotel and attractions businesses that so many were close to.

In July 2020, the Government used its Summer Economic Statement to announce a temporary reduction to the standard rate of VAT from 20% to 5% for the hospitality sector. The VAT cut was designed to encourage a consumer return to the sector.

In this Spring’s 2021 Budget, the Chancellor announced an extension to the timeframe for the VAT cut. The 5% rate of VAT will now apply until 30 September 2021. From 1 October 2021 the hospitality sector VAT rate is due to increase to 12.5% until to 31 March 2022, after which time it is due to return to the standard rate, currently at 20%.

The reduced rate applies to the following supplies:

• Hospitality

Supplies of food and non-alcoholic beverages for consumption on business premises (i.e. restaurant, café or pub), also supplies of hot takeaway food and hot takeaway non-alcoholic drinks.

• Hotel and holiday accommodation

Supplies of sleeping accommodation in a hotel or similar establishment, in addition to certain supplies of holiday accommodation including furnished holiday lettings and cottages. Fees for caravan and tent pitches, and associated facilities.

• Admission to certain attractions

Where businesses charged a fee for admission including standard rated VAT to certain attractions, this would benefit from the reduced rate of VAT. (However, if the fee charged for admission was currently exempt, then that treatment would take precedence and supplies will not qualify for the reduced rate.)

Preparing for 1 October 2021 and accounting for supplies that straddle the temporary reduced rate

In most cases, taxpayers will simply account for VAT at 5% for supplies made between 15 July 2020 and 30 September, and at 12.5% from 1 October onwards, with no dramatic impact on input tax recovery. Checks to EPOS systems and VAT reporting in these cases should be relatively simple.

However, there may be situations where payments are made, or invoices issued, before 1 October 2021 for supplies that take place on or after 1 October 2021. Where this happens, it is important to consider tax point rules for VAT and ensure the correct rate of VAT is applied.

• Basic tax point

The basic tax point for a supply of goods is the date the goods are removed, i.e; sent to, or taken by, the customer. If the goods are not removed, it is the date they are made available for their use. The basic tax point for a supply of services is the date the services are performed.

• Actual tax point

In the case of both goods and services, where a VAT invoice is raised or payment is made before the basic tax point, there is an earlier actual tax point created at the time the invoice is issued or payment received, whichever occurs first.

• 14 Day Rule

There is also an actual tax point where a VAT invoice is issued within 14 days after the basic tax point. This overrides the basic tax point.

• Cash Accounting

For businesses using the cash accounting scheme, VAT is accounted for when the business receives payment from its customers, unless it’s a returnable deposit.

• Deposits

Care should be taken when accounting for deposits. The VAT rules vary depending on the nature of the deposit, particularly where it may be returnable. An advance payment, or deposit, is a proportion of the total selling price that a customer pays before a supply of goods or services. The tax point will be either the date of issue of a VAT invoice for the advance payment, or the date of receipt of the advance payment, whichever happens first. Businesses should include the VAT due on the advance payment on the VAT Return for the period when the tax point occurs, at the VAT rate applicable at that time.

If the customer pays a remaining balance before goods are delivered or services are performed, a further tax point is created. This will be either on issue of the VAT invoice for the balance, or upon receipt of payment of the balance, whichever happens first. The business then includes the VAT due on the balance on the return for when the further tax point occurs.

Summary It is an important time to pay attention to VAT accounted for by businesses in this sector, ensuring that taxpayers correctly applied the 5% rate from 15 July 2020, assisting with preparations for the transitional rate to come into force on 1 October 2021, and looking forward to the eventual return to normal in April 2022.