The temporary 5% reduced rate of VAT to certain supplies relating to hospitality, hotel and holiday accommodation and admission to specific attractions applies until 30 September 2021.
From 1 October 2021, a reduced rate of 12.5% will be introduced which ends on 31 March 2022.
VAT will increase to the standard 20% rate on 1 April 2022.
The reduced VAT rate covers the following supplies:
- Hot and cold food and hot and cold non-alcoholic beverages sold for on-premises consumption;
- Hot takeaway food and hot non-alcoholic beverages sold for consumption off the premises;
- Sleeping accommodation provided in a hotel or similar;
- Holiday home accommodation;
- Accommodation in houseboats;
- Hire of boats such as cruisers provided they are suitable for holiday accommodation and are held out for hire in this way. This does not include day boat hire, or boats hired for purposes other than holiday accommodation.
- Hire of motorhomes provided they are suitable for holiday accommodation and are held out for hire in this way;
- Pitch fees for caravans, tents and supplies of associated facilities; and
- Admission to shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and similar cultural events (that do not already benefit from the existing cultural exemption).
It should be noted that the reduced rate does not include alcoholic drinks of any kind.
The reduced VAT scheme has no anti-forestalling provisions attached to it. This means that the VAT payable can be determined by the ‘actual tax point’ – the rate that applies when a payment is made or an invoice is issued to the customer.
Businesses can therefore obtain the reduced 5% VAT relief on bookings which are paid for prior to 1 October 2021, even if they take place after this date.
HMRC’s decision not to apply any anti-forestalling provisions to the VAT reduction was to support businesses in those sectors severely impacted by Covid-19 and social distancing measures. Obtaining the extra relief on pre-paid bookings provides an additional level of support, aiding recovery and profitability as restrictions are lifted.
Optimising the VAT reduced rate
Hospitality businesses that sell goods or services on a VAT inclusive basis would directly benefit from payments being made prior to 1 October. VAT liability will be reduced and the business’s bottom-line profit enhanced.
An example of this would be a holiday costing £300, including VAT. This would have a VAT liability for the business of £14.29 if paid before 1 October and £33.33 after this date.
Businesses can choose to charge 5% on services and goods that are purchased before 1 October. This means that where customers are invoiced on a VAT exclusive basis, they can be incentivised to make advance payments by highlighting the fact that they will save 7.5% VAT.
There is still time to pay for hospitality services and supplies that are required after 1 October upfront, extending the benefits offered by the temporary 5% VAT rate. Advance payments should be included as a ‘prepayment’ in your accounts.
VAT can be a complex area, should you have any queries on the rate changes or wish to discuss ways to optimise cash flow prior to the increased rate on 1 October, please get in touch with your usual M+A Partners contact or email firstname.lastname@example.org