Changing VAT rates causing confusion for hospitality businesses

The Chancellor’s Summer Statement described a reduction in VAT for businesses in the hospitality sector. In broad terms, this is a reduction in the VAT chargeable from 20% to 5%. This applies to food, non-alcoholic drinks, hot takeaway food, hot takeaway drinks, hotel and holiday accommodation, fees for caravan pitches and associated services, campsite pitches and admission to certain attractions. The change to the VAT rate applies from 15 July 2020 to 12 January 2021.

The first challenge for businesses is updating their own systems to reflect the reduced rate. This may involve updating till systems, invoicing systems and book keeping software. More on this can be found here.

For accommodation providers, deposits received in advance are causing confusion. Many accommodation providers have a high level of deposits held for cancelled stays which were due to take place during lockdown. These deposits have been rolled forward for the guest to use against a stay in the future. The business will have accounted for VAT on the deposit based on a 20% rate. If the stay subsequently takes place between 15 July 2020 and 12 January 2021 then the balance payable would naturally fall into the 5% VAT rate. However, there are also special provisions which allow businesses to restate the deposit to the 5% rate too, so long as the stay is occurring during the reduced VAT rate period. In order to do this you will need to credit note and reissue any VAT invoices already issued in connection with deposits received. The final invoice for the full stay will also need to state the entire amount at the 5% rate. There is no obligation for businesses to pass on the VAT saving (to read more on the effects of VAT on pricing here.

By way of an example, if a deposit was received in February 2020 for £84 then the VAT declared to HMRC was £14 (at the 20% rate). Let’s assume the guest has a rearranged booking for August 2020 where they will pay the balance of £168. To account for the VAT all at the 5% rate you will need to record a credit note / refund of £84 inclusive of 20% VAT. Then record the invoice/income as £84 inclusive of 5% VAT. This will correct the VAT on the deposit. Then you will need to record the balance of the payment as £168 inclusive of 5% VAT. I would suggest you only make these adjustments once the stay has happened, otherwise, you may have to unwind the transaction again if the booking is moved to a time post 12 January 2021.

In the run up to the end of the temporary reduction in the VAT rate, I expect accommodation providers may change their pricing behaviour and pass on a small proportion of the VAT saving to customers who pay deposits and full balances in advance. This is because businesses can choose not to apply the special provisions described above. The effect of this is that the 5% rate can be applied to any money received between 15 July 2020 and 12 January 2021 irrespective of whether the stay happens after this period. Therefore, businesses may seek to incentivise early payment by sharing some of the VAT saving.

There are a few other areas that businesses in this sector need to be aware of. For restaurants offering deals which include a meal and alcoholic drink for a single price, they will need to apportion the deal price between the food element at 5% and the alcoholic drink element at 20%. For any businesses operating the Flat Rate scheme for VAT, HMRC are adjusting the rates to reflect the reduction in VAT rate. Businesses operating the Tour Operators Margin Scheme will need to change the way they calculate their VAT and can refer to the updated guidance here.

The full guidance on the VAT rate reduction can be found here.

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