VAT rate reduction to 5% for hospitality sales – how it affects non profits

Last week the Chancellor announced that the rate of VAT, which applies to many supplies in the hospitality area, will be reduced from 20% to 5%. This is part of the wider ‘Plan for Jobs’ initiative, which aims to support businesses bounce back from the impact of the COVID-19 pandemic. It also follows similar steps taken by other EU governments.

When will the VAT cut start?

The reduced rates of VAT will come into effect from Wednesday 15 July 2020 and continue until Tuesday 12 January 2021. This should help ensure that a delayed summer season and the busy Christmas period can both benefit from its impact.

Food and non-alcoholic drinks – examples of where the reduced rate may apply

• Residential and day care centres which have cafes or charge staff and visitors for meals and drinks are all covered by the reduced rate. Where these centres make separate supplies of catering to users, these supplies will also be subject to the VAT relief. 
• Schools in some cases charge for meals and hot food (including hot drinks machines) to non-pupils or at catered events. These types of sales, not covered by the exemption, can apply the 5% rate.
• Some Cultural Bodies do not qualify as ‘eligible bodies’ and must charge 20% VAT on tickets sales. The 5% rate is tremendous boost for them once they can open again.
• Even Cultural Bodies who apply the exemption normally have catering and other ancillary hospitality sales that will benefit.
• Hotel-style accommodation is known to be provided by a number of non-profit bodies which will be at the reduced rate.
• Students Unions are being challenged on applying a concessionary exemption on catering sales, so this may be an alternative, as well as looking at hot food and drinks sold from shops.

Where you can apply exemption to any such sales, these continue to be exempt. Cold takeaway food is already subject to zero rate VAT.

It is important to note that alcoholic drinks are not included. These will continue to be subject to the 20% standard rate. For some organisations this will result in the need to manage several different VAT rates going forward.

Some common questions we have received

How do I calculate the new VAT rate where prices are VAT inclusive?

The VAT fraction for the 5% rate is 1/21.

What rate of VAT do I use for deposits and supplies that span the change in rate?

Where payment or a deposit has been received before 15 July 2020 but the goods/services are supplied after the VAT rate change, you can choose to charge and account for VAT at 5% but you must correct it by issuing a credit note which you would have to refund to the customer.

When is VAT deemed due to HMRC?

The tax point for VAT is the date that the VAT becomes due to HMRC 

The normal tax point rules for VAT are as follows:
The basic tax point rules are:

• Goods – the date the goods are sent to or taken away by your customer or made available to your customer
• Services – the date the service is performed or completed
  However, the basic tax point is overridden if an actual tax point is created.
  That is:
• If before the basic tax point, a VAT invoice is issued or receive payment for the goods/service – the tax point will be the date of the VAT invoice or the date when payment is received, whichever happens first
• If you issue a VAT invoice up to 14 days after the basic tax point, then the tax point is the date the invoice is issued

However, special rules can be adopted for the supplies that are made around the time of the reduction. Suppliers can opt to apply the rate of VAT in force at the time of the basic tax point where this is different from the rate that would otherwise apply under actual tax point rules.

What about invoices raised or payment is made for supplies being made after 12 January 2021?

There does not seem to have been any anti-forestalling legislation put in place by HMRC. Therefore, it appears from the information that we have at present that these supplies would be at the reduced rate even though they will be made after the date the reduced rate expires.

How organisations should prepare

Where such activity is taking place now, there are only a few days before these changes have effect, which doesn’t leave very much time to prepare. Some areas for you to focus on include:

• Ensure systems are set up to capture the correct VAT rate of supplies subject to the temporary rates, including till EPOS systems.
• Consider how the impacts on prices but we stress that there is no requirement under VAT Law to reduce prices.
• Review any pending orders or deposits received in order to be prepared with managing supplies which have a timeline covering both before and after the change.
• As many non-profit bodies cannot recover all of VAT costs, discuss with suppliers whether invoicing can be delayed to after the rate change is in force.
• As this change is occurring in the middle of VAT return periods, have reminders in place to take extra care with completing affected declarations.
• That extra care also needs to cover complex areas such as vouchers and ensuring that the correct tax point (ideally within the period of the temporary rate cut) applies. 

We will continue to update you if and when HMRC provides further guidance. 

To discuss how these changes could impact your organisation, please speak to your usual VAT team contact or Robert Warne.