Andrew Needham looks at the implications of the temporary 5% VAT rate for the hospitality industry.
Under current UK VAT law, the standard rate of VAT (20%) applies to all supplies of restaurant services, hot takeaway food, holiday accommodation and admission to many attractions.
Following the COVID-19 pandemic the hospitality industry has been very heavily economically impacted, so the government has introduced a stimulus package in the form of a temporary reduced rate of VAT of 5% covering the period 15 July 2020 to 12 January 2021. Its main objective is to support businesses severely affected by the coronavirus pandemic and social distancing measures.
The reduced rate will cover the following supplies:
1. Hospitality
The 5% reduced rate applies to supplies of:
- hot and cold food for consumption on the premises on which they are supplied;
- hot and cold non-alcoholic beverages for consumption on the premises on which they are supplied;
- hot takeaway food for consumption off the premises on which they are supplied; and
- hot takeaway non-alcoholic beverages for consumption off the premises on which they are supplied.
2. Hotel and holiday accommodation
Businesses will also benefit from the temporary reduced rate if they:
- supply sleeping accommodation in a hotel or similar establishment;
- make certain supplies of holiday accommodation;
- charge fees for caravan pitches and associated facilities; and
- charge fees for tent pitches or camping facilities.
The reduced rate does not apply to the hire of motor caravans.
Where hotels have long term guests (more than 28 days) and charge for meals, currently the meal charges are subject to standard rated VAT, while the accommodation charge is not subject to VAT. During the temporary reduction in the VAT rate the charge for meals will be subject to the 5% reduced rate and the accommodation charge will remain VAT free.
Attractions
If a business charges a fee for admission to certain attractions (e.g. theme parks or theatres) where the supplies are currently standard rated, the business will only need to charge the reduced rate of VAT between 15 July 2020 and 12 January 2021. The business can decide to either reduce its prices or retain the full entry fee and increase its profits. However:
- if the fee charged for admission is currently exempt that will take precedence and the supplies will not be subject to the reduced rate.
- any supplies of food and drink that are supplied as part of a supply of catering services for consumption off-premises remain standard rated. This will mean, for example, that a catering company asked to cater an event, such as business meeting at the businesses’ premises will still have to charge standard rated VAT on its services.
Tour operators margin scheme
If a business that buys in and resells travel, accommodation and certain other services, and acts in its own name, it may operate the tour operators margin scheme (TOMS) to simplify its calculations.
The temporary reduced rate for hospitality and tourism will have an effect on the mechanics of the TOMS calculation. Relevant supplies a business buys in will be subject to the reduced rate, which although not recoverable as input tax will reduce the cost applied to the margin.
The flat rate scheme
If a small business uses the flat rate scheme to simplify its VAT calculations they should be aware that certain percentages have been reduced in line with the introduction of the temporary reduced rate of VAT, so businesses in the hospitality sector will have a reduced flat rate percentage and a lower VAT bill.
Practical tip
If a business has issued invoices for supplies that straddle the change in rate, for example the seasonal pitch fee in a caravan park, it can be apportioned and a credit note issued.
