Temporary Reduction in VAT Rate for Hospitality and Leisure Sector

On 8^th July 2020, Chancellor Rishi Sunak announced temporary reduction in the VAT rates from 20% to 5% for certain supplies of hotel and holiday accommodation, hospitality and tourist attractions. Reduction in VAT rate is part of the Covid-19 measure taken by the government to revive the UK economy and to support businesses in the hospitality and leisure sector, that have been adversely affected by the lockdown caused by the pandemic.

• Sectors eligible for the temporary VAT rate reduction?
• Affected supplies
• The period rate cut applies to
• VAT on admission charges to attractions
• Reduction in VAT Flat Rate
• How much households could save from a VAT cut?

To whom temporary VAT rate reduction applies to?

Temporary reduction in VAT rates is applicable to all organisations (whether existing or new) that are making supplies of:

1. Hospitality
2. Hotel and holiday accommodation,
3. Certain admissible attractions as well as their advisers.

Affected Supplies

Reduction of VAT rates from 20% to 5% will benefit many industries affected by the Covid-19 and includes the following supplies:

1. Hospitality

   - Food and non-alcoholic beverages sold for consumption in cafes, restaurants and pubs. It is also applicable on take away food and non-alcoholic beverages.

2. Hotel and accommodations

   - including B&B’s or other similar establishments providing such facilities, holiday accommodation, Caravan and tent sites and other associated facilities.

3. Admission to certain attractions

   - making taxable admission supplies that are not eligible for the cultural VAT exemption.

The rate cut specifically excludes supply of catering services for consumption off-premises and admission to sporting events.

Also See: VAT Refunds in UK – How to Claim

Period for temporary VAT cut

Temporary reduction in VAT rates from 20% to 5% is applicable for 6 months starting from 15^th July 2020 to 12^th January 2021.

VAT on Admission charges to attractions

Temporary reduced VAT rates are only applicable to admission fees. It applies to all businesses making admission supplies that are taxable at standard rate and not eligible for the cultural VAT exemption. The VAT rates applies on admission to attractions like

1. Amusement parks
2. Fairs
3. Circuses
4. Museums
5. Zoos
6. Cinemas
7. Theatres
8. Shows
9. Concerts
10. Exhibitions
11. Similar cultural events and facilities

Admission to certain attractions like factory tours, distillery tours, studio tours etc. may also be eligible for the reduced rate.

The non-affected supplies which are excludes from the reduced rate include alcohol beverages, sporting events or any supplies that are not exempted under items 1 or 2 of Group 13 of Schedule 9 of VAT act 1994.

Mixed supplies/supplies that include other incidental supplies

Temporary reduction in the VAT rates also applies to supplies that are incidental to the main supply and therefore the whole supply could benefit from the reduced rate. For example – in case you are supplying a studio tour, but it also includes food and drinks incidentally as a part of the tour. Then, food and drinks will also benefit from the temporary VAT reduction. It will not qualify in cases, where the provision of food and drink is the main supply.

For mixed supplies to be eligible for the reduced rate, it will be the responsibility of the business or the taxpayer to demonstrate to HMRC that the supply is eligible for the temporary reduced rate.

Admission to Live online Performance

If an entrance fee is charged for viewing an online live performance, it may be eligible for temporary VAT reduction, provided the performance is not pre-recorded. The eligibility will depend upon the circumstances that may differ from case to case.

Also See: VAT Registration – How to Fill VAT1 Form?

Reduction in VAT Flat Rate Percentage

Due to the temporary reduction in the VAT rates, the VAT flat rate percentage for accommodation, catering (including restaurants and takeaways) have also been reduced for 6 months starting from 15th July to 12th January 2021. The recent amendments as per UK government in the VAT flat rate percentages are as follows –

1. Hotels and accommodation

   – Reduction in VAT flat rate from 10.5% to 0%.

2. Catering services (including restaurants and takeaways)

   – Reduction in VAT flat rate from 12.5% to 4.5%.

3. Pubs

   – Reduction in VAT flat rate from 6.5% to 1%.

What the business will save under flat rate?

Let’s consider by way of an example – assume you are a business running a pub.

1. As per old VAT flat rate

   – The six-month turnover for your business inclusive VAT is £60,000. The VAT flat rate before the temporary reduction for your business is 6.5%; your flat rate payment will be 6.5% of £60,000 i.e. £3,900.

2. As per new VAT flat rate

   – Considering the same turnover of £60,000 for six-months, the VAT flat rate for your business is now 1%; your flat rate payment will be 1% of £60,000 i.e. £600.

Savings = £3,900 (Amount as per old VAT flat rate) - £600 (Amount as per new VAT flat rate) = £3,300. Your business could therefore save £3,300 because of the change in flat rate.

It’s important to note that the new VAT flat rate will apply to all businesses in the above industry, irrespective of when they are established. So, for a newly established business and or a business that has recently registered for VAT, in addition to the above cut in VAT flat rate, they could also be eligible for the 1% discount applicable to businesses in their first year as a VAT registered business.

Due to the temporary rate cut in VAT, many businesses may want to shift to standard rate from the flat rate scheme, the merits of which will differ from case to case, but they should remember:

• Once left, they cannot join the scheme for 12 months
• They will need to notify in writing to HMRC that they would like to leave the scheme
• One of the key reasons of joining the scheme was to simplify VAT but now they will be required to maintain records of input VAT etc.

Therefore, in certain cases it may appear financially beneficial to move to the standard rate, businesses should consider the additional administration and efforts that may be required by leaving the scheme.

Also See: How to claim VAT on mileage expenses?

How much households could save from the VAT cut?

As per Treasury, temporary reduction in VAT rates will surely benefit everyone and save £160 for households on an average yearly. It would result in price cuts of 12.5 percent, in case business pass on the benefit in full to the customers.

For example – Suppose a household spends £15 on meals per week, it means they can save approximately £50 in 6 months, which is quite good.

But saving will mainly depends upon whether the businesses pass on the savings to consumers or not? Yes, it’s right. How much households can save basically depends upon the retailer or the company that whether they decide to pass the VAT cut on or not.

1. As per head of tax policy “Daniel Lyons” at accountants Deloitte – “You are expected to save £5.62 on a pub meal costing £45 without alcohol whereas you can save around £6.81 on one-night stay costing £54.50 in a family room at a hotel. You can also save nearly £18 on a family ticket to theme park. So much of savings but it is only possible when the merchant agrees to pass the cut on.”
2. There are many hotels which are not in a position to pass the cut on, due to reduction in the capacity of workers, PPE and cost of extra cleaning measures.

Also See: Mini UK Budget 2020 Announced: A quick guide to everything you need to know

Conclusion

Temporary reduction in VAT rates comes as a big relief for hotel, hospitality and certain eligible attractions. It is such an impressive decision by the UK government that will benefit both businesses and consumers and may help in saving much of their amount. It will protect 2.4 million jobs across the UK and also helps in reviving the economy from the coronavirus pandemic as a whole.

Where in doubt on how the reduction works, businesses should read HMRC guidance on “admission charges to attractions” or contact HMRC’s VAT enquiry helpline for further support on 0300 200 3700.

DNS Accountants are experts in VAT, contact us on 03300 88 66 86 to speak to our VAT expert for more details on how you could benefit as a business from the temporary VAT cut.

Also See: What is VAT Capital Goods Scheme?

About the author

Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.