VAT Cuts for the Hospitality Sector

From 15 July the rate of VAT on tourism and hospitality related services will fall from 20% to 5%, though not on alcohol.  What are the practical implications and how do you make the necessary changes to your accounts software?

Most businesses selling food, accommodation and alcohol will already record those sales through different account codes.  In this case changing the default VAT rate on the applicable sales codes is straightforward. 

In Xero you just need to go to the Accounting Tab – Chart of Accounts – Select the account code you wish to change and then change the default tax code from 20% (VAT on income) to 5% (VAT on Income) as below.

Businesses that currently record their food and drink together or that record alcoholic and non-alcoholic bar sales in one code may want to consider splitting these into different account codes to deal with the different VAT rates.  The alternative would be to record the different sales as different line items within the same account code.

In Quickbooks the process is very similar to Xero.  Go to Accounting – Chart of Accounts – Select the account code(s) you wish to change – Select Batch Actions – Select Default VAT Code and change to R for reduced rate VAT.

Sage’s default tax rate is T1 – 20% VAT and individual account codes do not have default tax rates.   For a business that still has some sales going through at 20% it is not advised to overrride this rate but instead ensure that all reduced VAT sales are entered using code T5 – 5% VAT.

Default tax rates can be set for bank receipts or for some or all customers.  These are accessed via Settings – Bank Defaults or Customer Defaults respectively.

Most hospitality businesses will have a till or front of house system and these will also need to be updated to reflect the changes.  Where the till software integrates directly with the accounts software the mapping settings will need to be reviewed to ensure sales are coming through at the correct rate of VAT.

Of course, it is important to remember to restore your original VAT settings when the VAT cut comes to an end on 12 January 2021.