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Hospitality industry 5% VAT rate to end 30 September

Due to the pandemic, on 8 July 2020, the government announced a temporary 5% reduced rate of VAT for certain supplies relating to hospitality, hotel and holiday accommodation and admission to certain attractions.

The reduced rate was initially introduced for a temporary period between 15 July 2020 and 12 January 2021 and was subsequently extended to 31 March 2021.

In the Budget 2021, the Chancellor announced that the 5% reduced rate would be extended again until 30 September 2021 and further that from 1 October 2021 until 31 March 2022, the temporary reduced rate of 5% VAT will change to the new reduced rate of VAT of 12.5%.

The normal standard rate of 20% will now return on 1 April 2022.

Here, Gemma McCaldon-Gower, VAT director at Cowgills looks at potential benefits for businesses not able to recover all of the VAT they incur, of making bookings such as your Christmas party before the 30 September, and some of the ongoing accounting challenges for the sector.


Advance bookings could create savings for businesses

There is no anti-forestalling legislation in place (rules which stops businesses paying for services before a VAT rate change, that are actually supplied after the VAT rate change) and so where payment is made by 30 September 2021 for a qualifying supply, the 5% VAT rate applies. This means that significant VAT savings could be achieved where payment is made in advance, i.e., for organisations which can not recover all of the VAT they pay.


How does this work in practice?

For organisations that can’t recover all of the VAT they incur, it could be worthwhile placing deposits or making payments pre-October 2021 before the VAT rate and therefore the price increases.

It doesn’t matter when the event takes place – output tax is calculated at the VAT rate in place at the time the deposit/payment is received regardless of when the supply takes place.

Businesses could consider placing deposits for events or hospitality now to get the benefit of the 5% rate.

By way of examples, bookings for hotels for a future conference; visits to attractions (excluding sporting events); and certain supplies of catering – can you book your staff Christmas party early?


What about businesses that can recover all of the VAT?

Businesses that can recover all of the VAT they incur, may still be blocked from recovering certain VAT that is deemed to be ‘business entertaining’.  Examples include director or partner only events, and client or customer entertaining.  Hospitality booked now might be cheaper so the actual cost to the business will be lower.

These scenarios do of course assume that the supplier has passed the VAT saving on to the customer which might not always be the case, but it does seem likely that there is scope for some good deals pre-30 September 2021 if the VAT tax point can be triggered on or before that date.


Accounting considerations for the sector

If your business is within the hospitality sector, the temporary rates have no doubt been a welcome measure – but they have undoubtedly created accounting challenges though and there’s still a lot to think about.

Businesses should be considering now whether their systems can cope with a brand-new rate of 12.5% – there’s never been a 12.5% rate of VAT before!

The table below details the VAT rates and the VAT fractions (used to work out the VAT on a gross or VAT inclusive total) for the duration of the VAT rate change:


DateVAT %VAT fraction
15 July 2020 to 30 September 20215%1/21
1 October 2021 to 31 March 202212.5%1/9
1 April 2022 onwards20%1/6


Considerations for Hospitality Businesses

Have you set up your new 12.5% VAT rate on your software? Don’t forget about pricing on your website, menus, etc.

Can your systems cope with a VAT change in the middle of a VAT quarter? Or deposits raised at a different VAT rate to the main supply?

Will your MTD compliance be compromised?

Are you intending to pass on the saving to customers and if not, are you ensuring that you’re legally able to do that?

If these questions are causing challenges for your business get in touch with Gemma at Gemma.McCaldon-Gower@cowgills.co.uk, or visit our website here.

VAT rate

The information was correct at time of publishing but may now be out of date.

Making Tax Digital
Posted by Cowgills
25th August, 2021
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