Reduced 5% VAT for leisure and tourism sectors

Amongst the stimuli announced by the Chancellor in his mini budget on 8 July was the temporary reduction of VAT chargeable on certain sales in the hospitality and leisure industries. The reduced rate is 5% instead of the standard rate of 20%, and is the lowest rate of VAT that can be applied to sales. It will apply from 15 July 2020 to 12 January 2021.

Three categories of supplies are covered:

• Sales of food and drink
• Hotels and holiday accommodation
• Admission to attractions

HMRC have updated some of the relevant VAT Notices on 9 July, although more comprehensive details of how the changes will apply are anticipated in advance of commencement on 15 July. The below covers what is known as at 10 July.

VAT on Food and drink

The circumstances in which the reduced rate will apply to sales that would otherwise be standard-rated are:

• Food and drink to be eaten on the premises, or
• Food and drink supplied hot to be taken away.

Cold takeaway food is not included because that would generally be zero-rated anyway, unless it was of products that are always standard-rated such as confectionery. Alcoholic drinks are excluded from the reduced rate and will remain standard-rated in all circumstances.

This will therefore apply to restaurants, pubs, cafés and take-aways.

VAT on Hotels and holiday accommodation

This includes sleeping accommodation in hotels, inns and bed & breakfast, holiday homes, caravan and campsites.

Admission to attractions

Admission to cultural and leisure attractions, where these are not already covered by the cultural exemption, will include theatres, cinemas, concerts, zoos, amusement/theme parks, fairs, circuses, exhibitions, shows, museums and similar cultural attractions. Sporting events are excluded, and the reduced rate only applies to admission charges and not separate charges once within the venue. HMRC also state that a charge to view a live performance online may also be eligible.

Practicalities

Affected businesses will need to:

• first identify the affected income streams and then ensure that they adjust their VAT accounting accordingly;
• make a decision of whether they pass some or all of the saving on to consumers in reduced prices, or retain the benefit themselves;
• Consider how to track sales at the reduced rate of VAT, adjusting VAT accounting software where necessary.

The relevant income streams may be easy to determine for providers in the hotel, holiday and attractions categories. However, they could require more detailed consideration for suppliers of food and drink who may already have many different products that are standard-rated for different reasons and which will therefore not all qualify for the reduced rate.

Adjusting their VAT accounting may mean simply adjusting the VAT rate used for the relevant income categories on their accounting system, where the relevant items are separately identified at the point of sale. However, some food and drink suppliers will currently record sales simply as either standard or zero-rated and rely on the knowledge of the staff to correctly enter each item. In this situation, unless all normally standard-rated items will be eligible for the reduced 5% rate, consideration will need to be given of how to ensure staff know how to allocate sales when there are three possible rates. A list alongside each till may be necessary.

Flat Rate Scheme

For smaller businesses that operate the flat rate scheme, accounting for the reduced rates will be much simpler. If they currently use the percentage applicable to one of the specified business categories, they simply need to apply the relevant reduced percentage to their sales from 15 July as follows:

Timing

The effective date (“time of supply”) of transactions for VAT purposes will need to be borne in mind for those items where pre-booking (and therefore potentially prepayment) applies, i.e. the hotel, holidays and attractions categories. Where a payment has already been received before 15 July for a supply made after that date VAT will already have been accounted for at 20% on the payment received under the normal VAT rules. In this situation the business can use special provisions to adjust the VAT on the prepayment to the reduced 5% rate. This is optional and would require a manual adjustment, but would provide the business with a VAT saving although if a VAT invoice had already been issued then a VAT credit note must be issued.

Conversely, VAT will only need to be accounted for at 5% on any prepayments received before the reduced rate ends on 12 January 2021, even if the booking is for after that date. This can be used by providers of holiday accommodation and attractions/events to encourage advance booking, since they can effectively offer a 12.5% advance booking discount to customers at no cost to the business.

How we can help However simple or complex the application of the change is to a business additional care will be needed in preparation of their VAT returns, especially in the periods spanning the start and end dates.

Shorts have a specialist VAT team that can help businesses navigate and benefit from the reduced rate of VAT. We can help:

• Identify sales that qualify for the reduced rate of VAT
• Advise on VAT accounting, adjusting software accordingly.
• Review VAT returns including the 5% reduced rate of VAT

If you think your business qualifies for the reduced rate and you require support with your VAT accounting, or you wish to understand more about the changes, please get in touch with our VAT specialist team.

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