End of reduced VAT Rate – what you need to know

VAT

As the end of the 5% reduced VAT rate for the hospitality sector came into place on 1 October 2021, Julie Green, VAT manager at MHA, says hospitality businesses need to get their tills and booking engines ready for the new VAT fraction, but that the toughest decision will be whether to pass on the tax rise to customers with many other goods and services already seeing price hikes:

“On balance hospitality businesses have enjoyed a much-needed good summer season, but they now need to prepare for the beginning of the end of the temporary reduction in the VAT rate on 1 October. Companies need to get on top of their accounting and administration processes as well as consider whether to pass on price rises to customers.”

When does the reduced rate end and what replaces it?

“On 30 September 2021 the 5% reduced rate ends and gives way to a new rate of 12.5% on 1 October, which will last until 31 March 2022, to help businesses manage the transition back to the old standard rate of 20% on 1 April 2022.

“The 5% reduced rate first came into force in the summer of 2020 and applies to restaurant meals, hot takeaway food, non-alcoholic drinks, hotel and holiday accommodation and admissions to certain attractions including fairs, amusement parks, concerts, cinemas and zoos.

“In order to prepare for 1 October businesses need to consider changes to their till systems, online booking engines and back-office functions, to make sure the correct amount of VAT is charged to customers and declared to HMRC. Changes to information on sales invoices and VAT till receipts may also be required.”

What is the new VAT fraction?

“From 1 October 2021, there will be a new VAT fraction which will need to be used to calculate the amount of VAT due to HMRC. To calculate 12.5% VAT when using cash receipts, business should use 1/9. For example, if a customer books a hotel on 1 October 2021 and pays £500, the output tax due to HMRC is £500 x 1/9 = £55.56.”

How to work out VAT on deposits?

“Businesses receiving deposits for accommodation or catering before 30 September 2021,

where either the stay or the catering will be provided between October 2021 and March 2022 (the 12.5% VAT rate period) or after 1 April 2022 (when the VAT rate reverts to the standard rate of 20%) should calculate VAT at the rate in place at the time the deposit is received.

“For example, if a customer books a holiday cottage on 1 September for a stay during March 2022 and pays a 50% deposit at the time of booking and the remaining 50% at the time of the stay, the business can still account for VAT at 5% on the deposit but will be required to account for VAT at 12.5% on the payment received at the time of the stay.”

What is the impact on the flat rate scheme?

“Some smaller businesses have signed up to HMRC’s flat rate VAT scheme to simplify their VAT payments. The flat rate scheme percentages will also change on 1 October 2021. The flat rate percentage for catering services including restaurants and takeaways will increase from 4.5% to 8.5%, the percentage for pubs will increase from 1% to 4% and the percentage for hotel and holiday accommodation will increase from zero to 5.5%.”

And the big question: should businesses raise prices?

“The most difficult issue businesses will have to consider is pricing. When the reduced rate of 5% was initially introduced they could decide whether to pass the reduction onto their customers or hold prices and retain the benefit to shore up finances to be able to survive the crisis. When the VAT rate rises, companies will have to decide whether they should pass the VAT increase onto their customers in order to strengthen their finances. They may feel that rising costs on cleaning and sanitation due to Covid-19 have already pushed up prices in hospitality and so they must bear the costs of the VAT increase themselves to remain competitive, particularly with the opening up of foreign travel.”

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