Hotels, Restaurants, Bars and Pubs: Tax implications in the ‘new normal’

Hotels, Restaurants, Bars and Pubs: Tax implications in the ‘new normal’

Andy Hamman, Director, Employment Tax
Hotels, Restaurants, Bars and Pubs: Tax implications in the ‘new normal’
The Prime Minister’s announcement on 22 September that operators must close at 10pm, the enforcement of face coverings and with more workers (again) encouraged to work from home, this adds further stress and challenges to the sector. 

Despite the most recent announcement restricting gatherings to six people or less, a sense of normality is slowly returning to the hospitality sector. However, there still remains a significant number of hurdles to overcome. 

Below we have set out some topical areas of taxation that businesses need to consider.

Service Charge, Tips and Troncs
As business starts to return, it is likely that any historic arrangements for dealing with service charge and tips may need revising. Existing tronc arrangements may no longer work against new operating models and indeed, previous troncmasters may no longer be in employment.

A slow return is likely to carry with it a significant reduction in customer gratuities, which ordinarily staff would rely upon in addition to their wages. In particular, hotel staff may find that they are returning to work but due to reduced occupancy levels, tronc funds are likely to be minimal if not non-existent.

We have the expertise to support and advise operators on the review, revision and tailoring of tronc arrangements to reflect the current circumstances and, importantly, to also ensure that once business does start to return to normality, arrangements remain flexible and can adapt.
End of the Coronavirus Job Retention Scheme (CJRS)
As 2020 starts to draw to a close, so the CJRS is winding down and will conclude. Calls for the scheme to be extended for certain sectors including hospitality have been firmly declined by government. Consequently, the underpinning of staff wages will cease at the end of October.

The government estimates that up to £3.5 billion has been paid out as a result of fraudulent claims or by claims in error and HMRC is now looking into 27,000 'high risk' cases where they believe a serious error has been made by employers.

Accordingly, we recommend that any employer that has claimed under the CJRS, undertakes suitable checks to scrutinise past claims to ensure proactive compliance.

For more information on the scheme, read our support for employers page.
Job Retention Bonus (JRB)

For those employers that continue to employ staff that were previously furloughed, the government will provide for a JRB of £1,000 per employee after 31 January 2021.

Employees must have been continuously employed by the relevant employer from the time of the employer’s most recent claim for that employee until at least 31 January 2021, and must have been paid an average of at least £520 a month between 1 November 2020 and 31 January 2021 (a total of at least £1,560 across the three months). 

The employer must have up-to-date Real Time Information (RTI) records for the period to the end of January to validate payments. Finally, employees must not be serving a contractual or statutory notice period that started before 1 February 2021, for the employer making a claim.

As we approach the end of the CJRS, employers are already considering next steps in terms of the workforce. The cessation of CJRS funding will place further financial stress on operators, with redundancies an inevitable element of restructuring. 

Some employers are already commencing consultation periods with their teams.

Additionally, lessons need to be learned from the financial crisis back in 2008, when employers had to make redundancies when trying to manage through the recession. We saw from this that a large number of employers did not apply the correct tax and National Insurance Contributions (NICs) treatment to their termination payments with HMRC enquiries as a result.

While redundancies are predominantly an employment law issue, the several changes to the income tax and NICs treatment of termination payments over recent years mean that special attention should be paid to ensure the tax and NICs position is correct.

Read our insight on the tax implications of redundancies for more information.

The hospitality industry has been benefitting from a reduced 5% rate of VAT since 15 July 2020.  This was introduced as part of the Chancellor’s summer statement and will have effect until 12 January 2021.

The reduced rate is applicable to several different areas. Firstly, the supply of sleeping accommodation in hotels can be subject to the reduced rate. This rate applies to all stays which take place in the period. It also applies to payments received during the period which are for stays from 13 January 2021 onwards.  

This allows for those booking next summer holidays to also enjoy the reduced rate of VAT, which may be helpful to hotelier’s promotional plans. However, the 5% rate will not apply if just a booking is made with payment deferred to the date of stay. In that case the stay would revert to the 20% rate.

The second area to benefit is that of catering. The 5% rate has been applied to:

  • supplies of food and non-alcoholic beverages for consumption on premises; and
  • hot takeaway food and hot takeaway non-alcoholic drinks.

The key point to note on the above is that alcohol (a drink containing more than 1.2% ABV) is excluded from the reduced rate of VAT, it remains at 20%. Additionally, when getting a takeaway only hot drinks benefit from the lower rate of VAT. This means that cold drinks, such as a can of Coke or a milkshake, stay subject to the standard rate.

Those in the trade will need to make sure that they have sufficient controls in place to manage this change and make sure that the correct amount of VAT is being accounted for. This will be particularly important where orders are taken which include items subject to both rates (i.e. a take away coffee and cold sandwich).

As a final point to note, the ‘Eat out to Help out’ scheme may be over but many businesses will not have yet submitted VAT returns which cover that time period. Care needs to be taken on calculating the VAT due for sales made under this scheme. Whilst the 5% rate will apply to relevant items, it is necessary to calculate the VAT by reference to the total undiscounted bill amount. Again, this will make it very important to keep good records and have sufficient controls to ensure VAT is not inadvertently under declared. 

Corporation Tax
With many companies expected to report a financial loss in 2020, there may be an opportunity to claim a repayment of the 2019 Corporation Tax liability earlier than usual. This provides a potential cashflow benefit as tax refunds can be accelerated and a potential claim should be considered as part of the overall tax payment strategy of the company.

Normally a company would have to wait until the statutory accounts have been finalised and submitted to Companies House and the final tax return to be completed, signed and submitted before a loss carry-back claim to the previous financial year can be made.  However, there is an alternative temporary measure in place

In broad terms, where a company can demonstrate to HMRC that it is expecting to make substantial losses in 2020, the loss carry-back claim can be submitted earlier, before the relevant 2020 accounts have been finalised. The claim can be made during the current 2020 financial year; there is no need to wait for the year-end to pass.  

Companies will be expected to provide HMRC with full evidence to support such claims and it varies on a case by case basis. This option is available for companies of all sizes.
Clearly there is a great deal for operators to consider as we approach the end of the year.  At this time compliance is key to ensure that valuable funds do not have to be spent on penalties or interest on tax wrongly calculated, and that no available opportunities to claim relief are missed. 

For more information on what your hospitality business should be considering at the moment, contact Andy Hamman or your usual Crowe contact.

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Stacy Eden
Stacy Eden
Partner, Head of Property and Construction