A new VAT rate for the hospitality sector

Demand for UK holidays has pushed up prices this year with a recent BBC Panorama report suggesting that holidaymakers are paying an average of £300 more per week in August 2021 compared to before the pandemic in August 2019.

Whilst hospitality businesses have enjoyed a much needed good summer season, especially those who had to scale back their activities or close down completely during the lockdown periods, they will need to prepare for the fact that the temporary reduction in the VAT rate from 20% to 5% will end on 30th September 2021 and will be replaced by a new rate of 12.5%.

Background

In the summer of 2020, the government announced a temporary reduction of VAT to 5% on supplies relating to:

  • Hospitality including restaurant meals, hot takeaway food and non-alcoholic drinks
  • Hotel and holiday accommodation including fees for campsites and caravan pitches
  • Admissions to certain attractions including fairs, amusement parks, concerts, cinemas and zoos

The temporary reduced rate originally applied to supplies that were made between 15 July 2020 and 31 March 2021.  In the Budget 2021, the Chancellor announced that the 5% reduced rate would be extended until 30 September 2021 with the introduction of a new reduced rate of VAT of 12.5% from 1st October 2021 until 31 March 2022 to help businesses manage the transition back to the standard rate on 1 April 2022.  

How to calculate the new rate of VAT

In order to calculate the amount of VAT due to HMRC from 1 October 2021, there will be a new VAT fraction. To calculate 12.5% VAT when using cash receipts, business should use 1/9. For example, if a customer books a hotel on 1 October 2021 and pays £500, the output tax due to HMRC is £500 x 1/9 = £55.56

The VAT Treatment of Deposits

Businesses receiving deposits for accommodation or catering before 30 September 2021,

where the stay or the catering will be provided during the 12.5% rate reduction period or when the VAT rate reverts to the standard rated of 20%, are able to calculate VAT at the rate in place at the time the deposit is received.

For example, if a customer books a holiday cottage on 1st September for a stay during March 2022 and pays a 50% deposit at the time of booking and the remaining 50% at the time of the stay, the business can still account for VAT at 5% on the deposit but will be required to account for VAT at 12.5% on the payment received at the time of the stay.

Businesses operating the flat rate VAT scheme

The flat rate scheme percentages will also change on 1 October 2021. The flat rate percentage for catering services including restaurants and takeaways will increase from 4.5% to 8.5%, the percentage for pubs will increase from 1% to 4% and the percentage for hotel and holiday accommodation will increase from zero to 5.5%.

How businesses can prepare for the new reduced VAT rate

In order to prepare for the changes to the reduced rate on 1st October 2021 businesses may need to consider changes to their till systems, online booking engines and back-office functions to make sure the correct amount of VAT is charged to customers and declared to HMRC. Changes to information on sales invoices and VAT till receipts may also be required.

The most difficult issue businesses may have to consider is pricing.  When the reduced rate of 5% was initially introduced businesses could decide whether to pass the reduction onto their customers or hold prices and retain the benefit to shore up finances to be able to survive the crisis. When the VAT rate rises, businesses will have to decide whether they must pass the VAT increase onto their customers in order to financially survive the ongoing impacts of the health crisis or whether the fact that rising costs on cleaning and sanitation have already pushed up prices means that they must bear the VAT increase themselves to remain competitive particularly with the opening up of foreign travel.

Find out more

To discuss how these VAT change will impact your business, please get in touch by emailing advice@taitwalker.co.uk .