The Government has introduced a temporary cut in the VAT rate from the standard 20% to 5% for holiday accommodation, catering and admission to attractions.
The relief originally covered supplies made between 15 July 2020 to 12 January 2021 across the UK. This has now been extended and the temporary rate will apply from 15 July 2020 to 31 March 2021.
This change is being introduced as an urgent response to the coronavirus pandemic, to support businesses severely affected by forced closures and social distancing measures.
The reduced VAT rate will cover 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).
The Flat Rate Scheme
Businesses that use the Flat Rate Scheme to simplify their VAT calculations should be aware that certain percentages have been reduced in line with the introduction of the reduced VAT rate.
Do I have to pass the VAT savings on to my customers?
No, you can pass on all of the VAT savings, some of them or none at all. Your decision should be informed by any existing contracts or agreements that detail how you deal with VAT.
Factors to take into consideration:
- Where any agreement with the customers states a VAT-inclusive price, it is likely you can choose whether to pass on the VAT saving;
- If tax invoices have been issued, where VAT is stated as a separate amount, then you will be required to issue a credit note reducing the VAT charged from 20% to 5%;
- Your customer will expect you to refund this credit to them and you will receive the credit for this on your next VAT return (after you have posted the VAT credit note into your accounts); and
- If you have not issued a tax invoice, there is no requirement to issue a credit note, however you are still entitled to make an adjustment on your next VAT return in respect of the VAT that has been overpaid at 20% and is due at 5%.
What about VAT already accounted for on invoices issued or payment received?
Example: A payment received on 21 January 2020 for a week’s holiday to be taken on 6 March 2021:
- In the absence of a tax invoice, the actual tax point is 21 January whilst HMRC will regard the basic tax point as 6 March 2021;
- If a tax invoice is issued, the actual tax point is the date of the tax invoice; and
- In this example, the business would have accounted for VAT at 20% on 21 January 2020 and now has the choice to do nothing or apply the 5% VAT rate and reduce the original amount in its current VAT records.
For services that span the rate change period, businesses will be able to account for VAT at the 5% rate on the part that takes place between 15 July 2020 and 31 March 2021. The part that takes place before 15 July 2020 will still be subject to 20% VAT.
Changes for sales from restaurants, cafes and bars
- If VAT is accounted for by identifying relevant supplies at point of sale, you will need to apply the new VAT rate to these relevant sales between 15 July 2020 and 31 March 2021;
- Changes may be required to tills and/or VAT accounting software to ensure that you account for VAT correctly; and
- If the VAT savings are to be passed onto customers, businesses should re-calculate VAT inclusive prices to reflect the reduction in VAT.