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Temporary VAT reduction for hospitality, holiday accommodation and attractions

The Chancellor's summer 'mini-budget' earlier this week introduced a number of measures designed to support, create and protect jobs over the coming months. In this article we'll provide some detail on the temporary VAT reduction on certain goods and services.

TEMPORARY 5% VAT RATE

From 15 July 2020, for just short of 6 months until 12 January 2021, the VAT rate on the following will be reduced from 20% to 5%:

  • food and non-alcoholic beverages sold for on-premises consumption, for example, in restaurants, cafes and pubs
  • hot takeaway food and hot takeaway non-alcoholic beverages
  • sleeping accommodation in hotels or similar establishments, holiday accommodation, pitch fees for caravans and tents, and associated facilities
  • admissions to the following attractions that are not eligible for the cultural VAT exemption: theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions, and similar cultural events and facilities

Other than takeaways, most businesses supplying such goods and services will have been due to re-open in Scotland on 15 July so the timing of this measure will be ideal. We recognise that such businesses will have a lot on their plates right now but should add two more things to the to-do list:

  1. Deciding how to approach pricing. For these types of supply the majority of sales are to consumers rather than businesses so VAT is generally a component of the sales price rather than an addition to it. Businesses can therefore choose to maintain pricing at existing rates and retain the full benefit of the rate cut. For example on £100 of sales the VAT at 20% is £16.67, while at 5% it comes down to £4.76, resulting in an additional £11.91 being retained. On the other hand a business could choose to pass on the full rate cut to the customer in order to try to stimulate demand; this would allow a sale previously priced at £100 to be reduced to £87.50, a price cut of 12.5%, with the value retained by the business being the same (£83.33). Many options exist between these two extremes, including across-the-board price cuts of less then 12.5%, or maintaining existing standard pricing while increasing special offers, cutting prices on some lines and maintaining them on others, or mixing and matching these approaches. This will be very much a personal choice and will depend on the circumstances of each business.
  2. Amending systems to cope with the VAT cut and any changes to pricing. Till systems will need to be updated; accounting systems will need to be amended (fortunately the 5% rate should already be set up but many sales lines and products/services may be linked to the 20% rate); and any 'self-billing' arrangements with third party booking sites will need to be checked as well. Where till settings don't cover every eventuality then staff will need to be trained to differentiate between sales at different rates.

It should be noted that alcohol sales have been excluded from the rate cut, so licensed premises could now have a mix of 20% (alcohol), 0% (cold takeaway) and 5% (see above) VAT-rated sales, depending on their service offering.

THE FLAT RATE VAT SCHEME (FRS)

Businesses using the FRS don't pay VAT at 20% and so won't pay the new 5% rate either, instead paying VAT on all their income at fixed rates which depend on their main category of supply.

In order for FRS businesses making the types of supply listed above to benefit from the rate cut HMRC are issuing temporary adjustments to some of the flat rates. Frustratingly at the time of writing (10 July) these new rates haven't been published yet, but we would assume that these would include Catering Services (currently 12.5%), Hotels/Accommodation (10.5%), Libraries/Museums (9.5%), and Pubs (6.5%). When the rates are published we suggest that any business using the FRS and making the types of supply listed above carry out an urgent review of their VAT position as it may be beneficial for some, but not all, to exit the FRS at this time.

This decision shouldn't be taken lightly as a business that leaves the FRS can't go back to it until 12 months have passed, and can only do so if their turnover is below £150,000 or less (excluding VAT) in the following 12 months. It's therefore quite possible that some businesses leaving the FRS now may not be able to get back in to the scheme in 2021.

Please contact us if you have any queries on the rate cut in general or how this affects the FRS in particular.

July 10, 2020

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