VAT Rate Reduction for Hospitality Sector
What’s the Change?
The Chancellor has announced a reduced rate for the hospitality sector. A 5% rate will apply from 15 July 2020 to 12 January 2021 on the following supplies:
- 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 theatres, circuses, museums, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and similar cultural events and facilities. Providing they are not within the VAT cultural exemption, which will often be the case with supplies made by a charity. It does not apply to sporting events.
When Must I Apply the Change
The change applies to all supplies made from 15 July.
The VAT system decides when a supply is made in accordance with special rules called tax point rules. These allow VAT to be accounted for either at the time a supply takes place or is performed (called the basic tax point) or at the time of invoice or payment, providing the invoice is issued before the supply takes place or within 14 days.
It follows that theoretically, if you made a supply covered by the new rules within 14 days before July 15 and only issued an invoice on the date of the change, then you can apply the reduced rate. This is unlikely to be much use in practice as few hospitality businesses give credit of this sort.
It is far more likely that a business will have received payment (actual tax point) before the basic tax point (performance). If the supply occurs after 15 July and you have already received payment, you can either apply the 20% VAT rate or apply the reduced 5% rate. For example, you might be a theatre that has sold a ticket or a theme park that takes pre-bookings. If you decide to do this, you will need to issue a credit note to your customer for the overcharged VAT with 45 days.
The choice over whether to use the new rate in such circumstances is that of the business. Clearly, since it needs to issue a credit to the customer, it will not gain from doing so. But the danger is, of course, that customers might expect it and get annoyed if they don’t get a credit.
What About Alcohol
The reduced rate does not apply to alcoholic beverages. Clearly, one of the obvious ways to try and get around this would be to package alcohol and a product that is sold at a reduced rate. A meal with wine, for example. A pie and a pint. Crisps and a bottle of Moet.
The VAT treatment of such packaged supplies is complicated, and it is not inevitable that the supply will be seen as being a single supply at the lower rate. In some cases, such as with a glass of beer provided at the end of a brewery tour, HMRC will accept the lower rate applies to the whole supply. But in most cases, it is far more likely that HMRC will see the need to apportion the supply.
If you want more information or have any questions about VAT and the hospitality sector, please get in touch. I don’t charge for an initial chat. Contact me here.